Understanding tax implications of employee stock options (ESOP): A comprehensive guide

ESOP rewards employees with parent company stocks, enhancing capital and ownership. You can manage ESOP shares with key documents: Demat account, employer portal, and salary slips.

Employee stock options

Rewarding employees with stocks of parent companies has become a common practice for many renowned institutions. The company increases its share capital through this Employee Stock Option Scheme (ESOS), meanwhile creating a sense of ownership for the employees.

Let's delve into the necessary paperwork to manage these shares properly.


  • Demat account statements are the primary mode of obtaining transaction details.

  • TDS at the time of investing is taken care of by the employer.

  • Dividend income is taxed as per individual slab rates.

  • SBI TTBR rate is used to convert foreign currency to Indian rupee.

How are employee stock options classified into different types?

Here are the different types of employee stock options:

ESOS (Employee Stock Options Scheme)

ESOS offers employees the opportunity to acquire company shares at a predetermined price on a future date as a reward.

RSU (Restricted Stock Unit)

These are the same as ESOS but come with zero cost to employees.

ESPP (Employee Stock Purchase Plan)

Under this plan, employees are granted company shares upon fulfilling specific goals but with a discount on the current market value.

Phantom shares

These are not actual ownership of company shares, but some notional units are allotted that replicate the actual share price.

Also Read: Taxation guide for those earning Rs. 10 lakhs - Pay zero tax!

Which documents for taxation are required?

Demat account statement

You can obtain detailed ledger clarification and dividend income reports from your foreign broker's terminal.

Employer's stock option management portal

This portal can help gather information like the fair value of allotted stocks, allotment date, transaction made (if any), any payment by the employee, exchange rate conversion in INR, etc.

Salary slips

Sometimes, salary slips can reveal the exact month of allotment in case the above two portals lack information.

Also Read: 5 best pharma stocks you should consider investing in

How are the ESOP shares taxed?

  1. The variance between the market price on the date of exercising and the amount you have paid is taxed at your prescribed tax rate.

  2. The difference between your sale value and the market price on the exercise date is taxed as either long-term capital gains @20% (holding above 24 months) or short-term gains as per slab rates (holding up to 24 months). 

  3. Any dividend received will also attract taxation as per your slab rates.

Parting thoughts

In conclusion, it's important to remember that while your employer manages the TDS for vested stocks, you are responsible for declaring foreign tax payments in "schedule TR" during ITR filing. Also, ensure you address the taxation of dividend income and capital gains according to your liabilities.

Disclaimer: This article is intended for general information and should not be construed as investment, tax, or legal advice. You should obtain independent advice when making such decisions.

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