Your ESOPs may be worth ₹1 crore. But how much will you actually take home? | ESOP cash out explained

For employees at startups and other companies offering employee stock options, an ESOP grant can become a meaningful part of their wealth. But a ₹ 1 crore value attached to those shares does not necessarily translate into ₹ 1 crore in the employee’s bank account when they eventually cash out.

The amount an employee actually takes home depends on what they paid to exercise the options, the fair market value (FMV) of the shares when they exercised them, how long they held the shares and whether the shares were listed or unlisted.

“Four variables decide the outcome, and the ₹ 1 crore headline is not one of them,” said Parag Jain, tax head at 1 Finance.

In Jain’s illustration, an employee whose ESOPs are eventually sold for ₹ 1 crore could be left with roughly ₹ 59 lakh to ₹ 68 lakh. The difference of nearly ₹ 9 lakh comes largely from the holding period and the resulting tax treatment.

The exercise price is the cash an employee has to pay out of pocket before owning the shares.

Jain’s example assumes an exercise price of ₹ 10 lakh and an FMV of ₹ 60 lakh on the exercise date.

The taxable perquisite is the FMV on the exercise date minus the exercise price, multiplied by the number of shares. In this case, the perquisite is ₹ 50 lakh.

The perquisite is added to salary income and taxed at slab rates. The employer deducts TDS on it under Section 392 of the Income Tax Act, 2025.

For an employee whose other income already places them in the top slab, Jain’s illustration assumes 30% tax, 10% surcharge and 4% cess, resulting in tax of about ₹ 17.16 lakh.

The effective rate changes with total income. Above ₹ 1 crore, the surcharge rises to 15%, taking the effective rate to about 35.88%. An employee whose other income is modest will pay less because part of the perquisite fills the lower tax slabs.

The catch is that the ₹ 27.16 lakh is payable whether or not a single share has been sold.

This can create a significant cash-flow problem for employees of unlisted companies, who may have to pay the tax while holding shares they cannot immediately liquidate.

When the shares are eventually sold, the cost base is the FMV at the time of exercise, not the exercise price, Jain said.

In the example, the shares had an FMV of ₹ 60 lakh at exercise and are eventually sold for ₹ 1 crore. The resulting gain is therefore ₹ 40 lakh.