ESOP taxation in India — including the 2026 change

Employees pay tax on ESOPs twice. First at exercise: the gap between the fair market value of the shares and what they paid (the strike) is a perquisite — salary income, taxed at slab rates, with the employer deducting TDS. Second at sale: capital gains on whatever the shares gained after exercise.

The exercise-time FMV is not a number you can pick. For unlisted shares, Rule 3(8) requires a valuation by a SEBI-registered Category I merchant banker — a chartered accountant’s report or a registered valuer’s report does not qualify for this purpose — and the report must be dated within 180 days before the exercise. Exercise against a stale or wrong-type valuation and the TDS position is defective.

The pain point is liquidity: employees owe tax on paper gains the moment they exercise, often years before any sale. Section 80-IAC softens this for eligible startups: TDS can be deferred until the earliest of a time window expiring, the employee selling the shares, or the employee ceasing employment.

The 2026 change: for shares allotted up to 31 March 2026, that window is 48 months from the end of the relevant assessment year (Income-tax Act 1961). For allotments on or after 1 April 2026, the Income-tax Act 2025 (Sec 392(3) read with 289(3)) extends it to 60 months. And a detail that trips people: eligibility needs the Inter-Ministerial Board certificate under 80-IAC — DPIIT recognition alone is not enough. When a trigger fires, TDS is due within 14 days, at the rates of the allotment year.