Stock Options and RSUs might sound like corporate jargon, but they could be your ticket to serious wealth. Before you cash in, know how taxes play a role. This beginner-friendly guide breaks it down, so you don’t lose your gains to the taxman.
What are Stock Options (ESOPs)?
Stock Options, also called Employee Stock Option Plans (ESOPs), give employees the right to purchase company shares at a fixed price, called the exercise price, after working for a certain period, known as the vesting period. You can choose to exercise the option and buy shares if the current market price is higher than the exercise price.
Key Terms to Know
Grant Date: When the company offers you the stock option.
Vesting Period: The minimum time you must stay with the company to earn the right to buy shares.
Exercise Price: The price at which you can purchase the shares.
Exercise Date: When you choose to buy the shares.
What are RSUs (Restricted Stock Units)?
RSUs are company shares awarded directly to employees after a vesting period. Unlike stock options, you don’t have to buy them; they’re simply given to you once certain conditions are met.
Key Terms to Know
Grant Date: When the RSUs are assigned to you.
Vesting Period: The waiting period after which the shares are transferred to you.
Taxable Event: The date on which you receive the shares (at vesting), and they are considered part of your salary.
Stock Options vs RSUs: What’s the Difference?
Aspect | Stock Options (ESOPs) | RSUs (Restricted Stock Units) |
Ownership | Right to buy shares | Directly awarded shares |
Vesting Requirement | Must complete vesting before exercising | Shares awarded after vesting |
Exercise Required | Yes, buy at a fixed price | No, shares are given automatically |
Taxation Point | On exercise and sale | On vesting and sale |
Market Risk | Yes, based on the stock price at the time of exercise | Lower; ownership happens after vesting |
How Stock Options and RSUs Are Taxed in India
1. Tax on Stock Options (ESOPs)
Let’s say:
Your company offers you ESOPs at an exercise price of ₹100.
The fair market value (FMV) of the shares on the day you decide to ‘exercise’ (buy) them is ₹300.
You later sell them at ₹500.
At Exercise
FMV - Exercise Price = ₹300 - ₹100 = ₹200.
This ₹200 is considered salary income and taxed according to your income slab.
You pay this in the financial year you exercise the option (not when you sell).
At Sale
You bought at ₹300 (FMV), sold at ₹500 → Gain = ₹200.
If you sell
Within 12 months of exercise: You pay 15% Short-Term Capital Gains (STCG) tax on ₹200.
After 12 months: You pay 10% Long-Term Capital Gains (LTCG) tax on ₹200 (only if your total LTCG for the year exceeds ₹1 lakh).
2. Taxation of RSUs (Restricted Stock Units)
Let’s say:
You’re granted 100 RSUs.
On the vesting day, the share price is ₹300.
You sell them later at ₹450.
At Vesting
100 shares × ₹300 = ₹30,000.
This ₹30,000 is considered salary income and taxed as per your income slab.
At Sale
Sold at ₹450 → Gain = ₹150 per share × 100 = ₹15,000.
If you sell:
Within 12 months after vesting, → STCG tax at 15%.
After 12 months → LTCG tax at 10% (only if gains exceed ₹1 lakh).
Tax-Saving Tips for Stock Options and RSUs
While Stock Options (ESOPs) and Restricted Stock Units (RSUs) can offer a path to significant long-term wealth, they can also come with a hefty tax bill if you're unprepared.
Here are some practical and strategic ways to minimise your tax burden while making the most of your equity compensation:
1. Time Your Exercise (for ESOPs)
If you're earning less in a financial year, like during a job switch or sabbatical, it might be a good time to exercise your options. Since the profit from exercising gets added to your salary, a lower income year means less tax.
Tip: To reduce tax, don’t exercise all options at once. Spread them out over a few years.
2. Diversify After You Sell
Holding on to company stock feels safe, but it’s risky. Selling some shares lets you invest elsewhere and protect yourself from depending too much on one company.
Tip: If you hold shares for more than 12 months, you’ll pay only 10% LTCG tax (if your gains are over ₹1 lakh).
3. Know the Two Tax Events
Tax hits twice:
• When you get the shares (vesting/exercise), they are taxed as salary
• When you sell them, they are taxed as capital gains
Tip: Plan ahead. Set aside money for taxes and talk to a tax expert in big equity years.
4. Use Capital Gains Exemptions
If you made a profit and it qualifies as LTCG, you can save tax by reinvesting in certain options like:
• 54EC Bonds (NHAI/REC) – lock-in for 5 years
• ELSS mutual funds or select real estate under specific rules
Tip: You must reinvest within 6 months to claim the benefit.
5. Keep Track of Everything
Equity involves many details, including grant dates, vesting, FMVs, sale price, and more. Keep everything organised. This helps when filing taxes or calculating your gains.
Tip: Use a spreadsheet or app, and save all documents like grant letters, demat statements, and Form 16/12BA.
Don’t Let Taxes Eat Your Equity Gains
Stock Options and RSUs can boost your wealth, but only if you plan smartly. Most beginners make the mistake of focusing on potential profits while ignoring taxes. Understanding how and when tax applies lets you unlock real value from your equity compensation.
The rules may feel confusing at first, but keeping track of vesting dates, sale dates, and income levels can make a big difference. With the right strategy, you can keep more of your hard-earned gains and avoid nasty tax surprises down the road.
Whether you’re planning your first sale or just starting to receive equity, this guide gives you a head start.
Glossary: Simple Terms Explained
Grant Date: The date when your employer gives you the stock option or RSU offer.
Vesting Period: The time you need to work before earning your shares or the right to buy them.
Exercise Price: The fixed price at which you can buy shares under a stock option plan.
Exercise Date: The date on which you choose to buy your shares using a stock option.
Fair Market Value (FMV): The current market price of a company’s share at any given time.
Short-Term Capital Gains (STCG): Tax on profits made from selling shares within 12 months.
Long-Term Capital Gains (LTCG): Tax on profits made from selling shares after 12 months.
54EC Bonds: Government-backed bonds that help you save on LTCG tax if invested within 6 months of sale.
ELSS: Equity-linked savings schemes are mutual funds offering tax-saving benefits under Section 80C.
Form 16/12BA: Tax documents given by your employer that detail salary and perquisites like ESOPs or RSUs.
Disclaimer: This article is for informational purposes only and should not be considered financial or tax advice. Please consult a certified tax advisor or financial planner to make decisions based on your specific situation.
