Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
At exercise — perquisite
FMV on the exercise date minus your exercise price is added to salary and taxed at your slab. This is the point that catches employees out, because there’s no sale yet.
At sale — capital gains
When you sell, the gain over the FMV-at-exercise is capital gains (short or long term by holding period). Eligible startup employees can defer the exercise-stage tax.
Worked numbers, and the listing twist
A simple example makes the two points concrete. Suppose an employee is granted options at a ₹10 exercise price, exercises when the fair market value is ₹100, and later sells at ₹250. At exercise, ₹90 a share (₹100 minus ₹10) is a salary perquisite, taxed at slab rates and shown in Form 16, with TDS deducted by the employer — even though the employee has paid out ₹10 and received no cash. At sale, the gain over the ₹100 FMV, here ₹150 a share, is a capital gain, short- or long-term by the holding period from the exercise date. Whether it’s long-term, and at what rate, depends on whether the shares are listed: listed shares turn long-term after 12 months and use the equity rates, unlisted after 24 months. The exercise-stage value isn’t taxed again at sale — only the further gain is. The practical pain is the exercise-stage tax falling before any liquidity, which is exactly what the startup deferral addresses for eligible DPIIT companies. Keeping the FMV-at-exercise on record is essential, since it’s both the perquisite measure and the cost base for the capital gain. Confirm current holding periods and rates per the Finance Act.