Legal basis: Section 17(2)(vi) and Section 192(1C), Income Tax Act 1961 — Effective: ongoing (capital gains rates per Finance Act 2024, effective 23 July 2024). Source: https://www.incometaxindia.gov.in/w/taxation-of-employee-stock-option-plan-esop- . Last reviewed by CA Harun Raaj: September 2026.
If you exercised stock options at an Indian startup during FY 2025-26, you have two separate tax events to account for — a perquisite at exercise and capital gains at sale — and, if your employer is a DPIIT-recognised startup with an Inter-Ministerial Board certificate, a possible TDS deferral under Section 192(1C). Here is how each piece works and how to report it in your AY 2026-27 ITR.
Key point: Exercising ESOP options triggers a taxable salary perquisite under Section 17(2)(vi) whether or not you sell the shares, and only startups with both DPIIT recognition and an IMB certificate under Section 80-IAC can defer the TDS on that perquisite under Section 192(1C).
The Three Tax Events in an ESOP Lifecycle
Grant: No tax. The grant letter creates a contractual right, not a transfer of property.
Vesting: No tax. Vesting is the right becoming exercisable; no shares are allotted.
Exercise — the first tax event (Section 17(2)(vi)):
When you exercise options, shares are allotted at the exercise price. The spread between the market value and exercise price is a perquisite:
Perquisite value = (FMV on exercise date − exercise price) × number of shares exercised
This perquisite is added to your gross salary income and taxed at your applicable slab rate. Under Section 192(1), your employer must deduct TDS on this perquisite as part of salary. It appears in Form 16 Part B under Rule 3(f): "Value of benefit to employee resulting from purchase of securities at less than market price."
Capital Gains at Sale — The Second Tax Event
Your cost of acquisition for capital gains is the FMV at exercise (the value already taxed as perquisite). The holding period starts from the exercise date, not the grant date.
Finance Act 2024 rates (effective 23 July 2024):
Most startup shares are unlisted. If your startup did an SME IPO during the year, shares allotted before listing are unlisted at exercise; post-listing sales on the exchange are listed security transactions.
Section 192(1C) — TDS Deferral for Eligible Startups
Employees at qualifying startups can defer the payment of TDS on ESOP perquisites until a trigger event.
Eligibility conditions (BOTH required):
- The employer is a DPIIT-recognised startup under the Startup India Scheme.
- The employer holds an Inter-Ministerial Board (IMB) certificate under Section 80-IAC of the Income Tax Act 1961.
DPIIT recognition alone is not enough — the IMB certificate is the second, harder-to-obtain condition.
When eligible, TDS is payable within 14 days from the earliest of:
- 48 months from the end of the Assessment Year in which shares were allotted.
- Date of sale of the ESOP shares.
- Date of cessation of employment.
Critical nuance: Section 192(1C) postpones TDS payment, not the tax liability itself. The perquisite income is calculated and reported at the rate applicable in the year of exercise — you owe the same tax, it is just paid later.
Reporting in Your AY 2026-27 ITR
Which form? ITR-2 if you have salary plus capital gains and no business income. ITR-3 if you have business income (trading profits, freelancing, etc.).
Schedule S (Salary):
- Report the perquisite value under "Value of perquisites under section 17(2)."
- This must match the Form 16 Part B figure.
Schedule CG (Capital Gains):
- If you sold shares, report under the appropriate gain type (STCG 111A / LTCG 112A / unlisted).
- Cost of acquisition = FMV at exercise, obtained from your employer's valuation record.
For Section 192(1C) deferral cases:
- The perquisite income is still reported in the AY of exercise even if TDS was deferred.
- Form 12BAA from your employer documents the deferred TDS position.
- Ensure Schedule TDS in the ITR correctly reflects deferred credits if applicable.
FMV verification: Under Rule 3(f) of the IT Rules, FMV of unlisted shares must be determined by a Category I/II Merchant Banker or a Chartered Accountant. Your employer must have this valuation report on file — if not, flag it as a compliance gap before you file.
ITA 2025 — What Changes for Tax Year 2026-27?
For AY 2026-27 (FY 2025-26), the Income Tax Act 1961 applies, and you use the current ITR forms (2/3, 3CA/3CD where applicable, Form 16, etc.).
From Tax Year 2026-27 (FY 2026-27) onward, the Income Tax Act 2025 takes over. Section 17(2)(vi) maps to Section 25(2)(vi)(b) of ITA 2025, and Section 192(1C) maps to Section 392(3) read with Section 289(3) of ITA 2025. The underlying mechanics are equivalent — only the section numbers change. Do not use ITA 2025 section references in your AY 2026-27 filings.
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For ESOP compliance review, ITR filing for founder-employees, and 80-IAC certification support:
ESOP Advisory — pvtltd.co
ITR Filing for Founders — pvtltd.co
This article is based on the Income Tax Act 1961, Finance Act 2024, and Rule 3(f) of the IT Rules 1962. It is for general informational purposes only and does not constitute tax advice — your specific facts (valuation, holding period, employer certification status) can change the outcome.
I'm CA Harun Raaj. If this affects your company's compliance calendar, reach out.
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See Also
Frequently asked questions
My employer didn't deduct TDS on my ESOP exercise. What do I do?
Report the full perquisite income in your ITR regardless of whether TDS was deducted. Pay self-assessment tax plus interest under Section 234B/234C. The TDS shortfall is your employer's compliance failure, but your tax liability under Section 17(2)(vi) stands.
How do I find the FMV at exercise date for unlisted shares?
Under Rule 3(f) of the IT Rules, your employer must have a valuation report from a Category I/II Merchant Banker or a Chartered Accountant. If they don't have this on file, ask for it — without FMV documentation, you cannot accurately compute your perquisite income or your capital gains cost basis.
I sold my shares after our company listed on NSE Emerge. Are those listed or unlisted gains?
Shares allotted before the listing date are unlisted at exercise, and the capital gains holding period begins at exercise. If you sell on the exchange after listing, those are listed security transactions attracting STCG under Section 111A or LTCG under Section 112A.
Our startup has DPIIT recognition but not an IMB certificate. Can we use Section 192(1C)?
No. Both conditions are required under Section 192(1C) — DPIIT recognition and an Inter-Ministerial Board certificate under Section 80-IAC. DPIIT recognition is a prerequisite for applying for the IMB certificate, but recognition alone does not satisfy the deferral condition, so TDS must be deducted normally at exercise.
Which ITR form should I use if I have ESOP perquisite and capital gains income?
Use ITR-2 if you have salary income plus capital gains and no business income. Use ITR-3 if you also have business income, such as trading profits or freelancing income.
Does the Section 192(1C) TDS deferral reduce my total ESOP tax liability?
No. Section 192(1C) defers only the payment of TDS, not the underlying tax liability. The perquisite income is still calculated and reported in the year of exercise at the rate applicable that year — the tax owed is the same, it is simply paid later, within 14 days of the earliest trigger event.
Do I need to use Income Tax Act 2025 section numbers when filing my AY 2026-27 ITR?
No. For AY 2026-27 (FY 2025-26), the Income Tax Act 1961 applies, so you continue citing Section 17(2)(vi) and Section 192(1C). The Income Tax Act 2025 equivalents — Section 25(2)(vi)(b) and Section 392(3) read with Section 289(3) — only take effect from Tax Year 2026-27 (FY 2026-27) onward.
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