Regarding Tax on ESOP at the time of Exercise - Unlisted Company

specifically a holding company in the USA with subsidiary employees in India.

 Here's a general overview: -

 ESOPs granted to Indian employees are considered perquisites and are taxed as income. - When an employee quits and exercises their ESOP option later, the gain is considered income and is taxable. - The ex-employer (Indian subsidiary) may have an obligation to deduct tax at source (TDS) if the gain is considered income. -

The ex-employee is responsible for reporting the gain and paying tax on it. However, please consult a tax expert or chartered accountant for personalized advice, as tax laws and regulations can change. They can help you understand the specific tax implications and obligations in this scenario. Additionally, you may want to refer to the Income-tax Act, 1961, and consult the official website of the Income Tax Department of India for more information on tax applicability and TDS guidelines. Let me know if you have any further questions!

Thank You Sir for the reply.

For unlisted company ESOPs, the tax at exercise works like this.

The difference between Fair Market Value (FMV) on the exercise date and the exercise price you paid is treated as perquisite income. This gets added to your salary and taxed at your applicable slab rate. Your employer deducts TDS on this at source when allotting the shares.

For unlisted companies, FMV must be determined per Rule 3(8) of the Income Tax Rules:
- As per Net Asset Value from the last audited balance sheet, OR
- Certified by a Category I Merchant Banker or Registered Valuer as on the date of exercise

Important note for eligible start-ups: if the company qualifies under Section 80-IAC and meets the Finance Act 2020 conditions, the TDS on ESOP perquisite is deferred until the earliest of: 5 years from exercise, the date you leave the company, or the date you sell the shares.

After exercise, if you sell the shares, the gain is a separate capital gain. Unlisted shares held for more than 24 months are long-term, taxed at 12.5% without indexation.

For the full tax computation with examples, ITR schedule entries, and the start-up deferral conditions, this [ESOP taxation guide for AY 2026-27](https://taxgarden.in/blog/esop-stock-options-taxation-india-ay-2026-27) has a step-by-step breakdown.

As far as an unlisted company is concerned, the taxation of ESOPs on the date of exercise takes place in accordance with Section 17(2)(vi) of the Income-tax Act. The difference between the Fair Market Value (FMV) on the date of exercise and the amount paid by the employee towards the exercise price would be considered as perquisite and taxable under the head Salary in the year of exercise.

 FMV in the case of an unlisted company is to be calculated by a Category-I Merchant Banker under Rule 3(8) of the Income-tax Rules.

 Example:

>  Exercise Price: ₹100 per share
>  FMV on Exercise Date: ₹500 per share
>  Perquisite Taxable Amount: ₹400 per share

After that, when the shares are disposed of, then a Capital Gains Tax shall apply. The FMV as the basis for determining the perquisite would become the cost of acquisition for capital gains purposes.

Thus, even before the sale of the shares, there can be a tax liability on the perquisite amount, which may arise during the exercise of the ESOP (provided certain conditions are met).

On exercise of a US parent’s ESOP, the difference between the fair market value of the shares on the exercise date and the exercise price is generally taxable in India as salary/perquisite under section 17(2)(vi), if the employee earned the option through Indian employment. The fact that the options are exercised after resignation does not, by itself, make the benefit non-taxable or shift it automatically to the individual’s capital gains income. Any later sale is a separate capital-gains event.

• The former Indian employer’s TDS obligation depends on whether it is the entity providing the ESOP benefit or otherwise responsible for paying the salary/perquisite, and on the plan and payroll arrangements. If it has no role in the post-exit exercise or payment, whether it must deduct TDS requires review of the specific facts; the former employee should not assume the tax is discharged.
• The employee should report the perquisite and pay any tax due, including advance tax where applicable, if tax was not withheld. Obtain the exercise statement, valuation/FMV workings, grant and vesting details, and any payroll or tax-withholding records.
• Cross-border facts—such as where services were rendered during the vesting period, the employee’s Indian tax residence, and any foreign-tax withholding—can affect the India tax computation and treaty relief.

This ESOP review fits naturally into exit payroll, perquisite valuation and the employee’s return-of-income reconciliation. Manual tracking across grant, vesting, exercise and sale records is difficult; automation reduces repetitive work while professional judgment remains in control. At Jir AI, our 2,000+ AI agents and 650+ integrations streamline GST, ITR, TDS, TCS and other compliance workflows, helping reduce manual workload by up to 70%. For help streamlining compliance workflows, connect with us on WhatsApp: https://wa.me/message/3HVOZ7HIY4ESC1