Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
Two taxing points
At exercise, the gap between the fair market value on that date and the exercise price you pay is a perquisite, taxed as salary. At sale, your gain is the sale price minus the fair value already taxed at exercise — so you are not taxed twice on the same amount.
Capital gains on the sale
For unlisted shares, gains are long-term if held over 24 months (taxed at 12.5%) and short-term otherwise (taxed at your slab). The holding period for the sale generally runs from the date of exercise/allotment. Rates and periods change with the Finance Act — confirm before selling.
A worked example
Suppose you exercise at ₹10 when the fair value is ₹100 — the ₹90 difference is a perquisite taxed as salary in the year of exercise. You later sell at ₹300 — the ₹200 gain over the ₹100 fair value already taxed is your capital gain, so the same ₹100 is never taxed twice. Whether that gain is long-term depends on holding the shares more than 24 months from exercise; below that it is short-term at slab rates. For employees of an eligible startup, the exercise-stage perquisite tax can be deferred under Section 192(1C) until roughly five years, leaving the company, or selling the shares — whichever is earliest — a real help while the shares are still illiquid. Confirm current rates, holding periods and the deferral conditions per the latest Finance Act. Our ESOP advisory service can run your specific numbers.