all four ESOP stages with the tax impact in India so you can see exactly where Section 17(2) fits in and where capital gains come into play.

let’s go through all four ESOP stages with the tax impact in India so you can see exactly where Section 17(2) fits in and where capital gains come into play.

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1. Grant Stage

• What happens: Employer offers stock options to employee.

• Tax impact: No tax at grant — you only have a conditional right, not an asset.

• Section applicable: None yet, because there is no "perquisite" or "income".

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2. Vesting Stage

• What happens: Employee earns the right to exercise options (subject to terms, like tenure or performance).

• Tax impact: No tax at vesting — still no transfer or actual benefit.

• Note: Vesting is only the "unlocking" of the right, not the receipt of shares.

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3. Exercise Stage ✅ (Section 17(2) applies here)

• What happens: Employee chooses to exercise options, pays exercise price, and becomes entitled to shares.

• Tax impact: Perquisite Tax under Salary

  • Taxable value = FMV on date of exercise − Price paid by employee

  • FMV is determined under Rule 3(8) of the Income-tax Rules.

  • This value is taxed as part of "salary income".

• Employer duty: Deduct TDS on perquisite value.

• Section applicable: Section 17(2)(vi).

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4. Sale Stage

• What happens: Employee sells the shares in the market (or privately).

• Tax impact: Capital Gains Tax

  • Sale Price − FMV on exercise date = Capital Gain.

  • Holding period starts from the date of allotment after exercise.

    • Listed shares:

      • ≤ 12 months: Short-Term Capital Gain (STCG)

      • > 12 months: Long-Term Capital Gain (LTCG)

    • Unlisted shares:

      • ≤ 24 months: STCG

      • > 24 months: LTCG

  • Rates:

    • Listed LTCG: 10% over ₹1 lakh (Sec. 112A)

    • Listed STCG: 15% (Sec. 111A)

    • Unlisted LTCG: 20% with indexation

    • Unlisted STCG: Normal slab rates.

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Putting it all together

Stage	Event	Tax Head	Basis of Tax	Section / Rule
1. Grant	Option offered	No tax	–	–
2. Vest	Right earned	No tax	–	–
3. Exercise	Shares allotted	Salary (Perquisite)	FMV on exercise date − Exercise price	Sec. 17(2)(vi) + Rule 3(8)
4. Sale	Shares sold	Capital Gains	Sale price − FMV at exercise	Sec. 45, 111A, 112, 112A

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