ESOP Management

Under Section 17(2)(vi) of ITA 1961 (applicable for AY 2026-27 and earlier), the perquisite is taxed at exercise — computed as fair market value on the date of exercise minus the exercise price paid. For unlisted companies, FMV must be determined by a merchant banker as per Rule 3(8)(iii) of the Income-tax Rules 1962. For TY 2026-27 onwards under ITA 2025, the same perquisite treatment is preserved under Section 17(2) read with the updated Rules.

The employer must deduct tax at source on the perquisite value at exercise under Section 192 of ITA 1961 (Section 392 of ITA 2025 for TY 2026-27 onwards). Eligible start-ups recognised under Section 80-IAC may defer TDS under Section 192(1C) to the earlier of: date of sale of shares, cessation of employment, or 5 years from allotment. Form 12BA must be issued to the employee disclosing the perquisite value.

ESOP schemes must be approved by special resolution under Section 62(1)(b) of the Companies Act 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules 2014. On allotment, Form PAS-3 must be filed with the Registrar of Companies within 15 days. The company must also maintain a register of employees and options under Rule 12(10) and disclose ESOP details in the Board Report under Rule 12(9).

Allotment to a person resident outside India constitutes foreign investment under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (FEMA 20R). The company must file Form FC-GPR on the RBI FIRMS portal within 30 days of allotment. Exercise price received must be remitted through normal banking channels and the inflow reported. Failure to file FC-GPR within the prescribed timeline attracts compounding under FEMA Section 15.

On sale, gains are computed under Section 45 of ITA 1961 (Section 67 of ITA 2025 for TY 2026-27). The cost of acquisition is the FMV already taxed as perquisite at exercise. For listed shares held over 12 months, long-term gains above Rs 1.25 lakh are taxed at 12.5% under Section 112A; short-term gains are taxed at 20% under Section 111A. For unlisted shares, 24 months holding is required for long-term status, taxed at 12.5% without indexation under Section 112.