How are ESOPs taxed for employees of Indian startups?

ESOPs are usually taxed at two points:

1. Exercise — the gap between fair market value and the exercise price is taxed as a perquisite under salary.
2. Sale — any further gain is capital gains (holding period starts from the exercise date).

For eligible DPIIT-recognised startups, employees can defer the perquisite tax until the earliest of: leaving the company, selling the shares, or 48 months from the end of the exercise-year. The company still has to report this correctly in payroll and withhold when the deferral ends.

Grant and vesting themselves are generally not taxable. Get a valuation and a written ESOP plan before you promise options — informal “you’ll get 1%” emails create disputes and tax mess later.