In November 2024, foodtech major Swiggy went public with an INR 11,327 Cr IPO. This was one of the largest IPOs in the startup ecosystem of India recently, with many of the Swiggy employees getting a chance to make generational wealth by selling their shares they received via employee stock option plan or ESOPs.

ESOPs have become a key talent retention and wealth creation strategy for many startups in India, especially as the ecosystem has matured and the surge in the number of public listings.

However, while the ESOPs are beneficial for the employees, the benefits are yet to come on par with the conventional capital gains from the market.

How ESOP Taxation Currently Works

Essentially, when employees of startups or unlisted companies receive shares via ESOPs, they have to pay taxes on two occasions: once when they exercise the option (i.e buy the shares) and when they sell them. There is no tax on granting of ESOPs or their vesting period.

For most employees, the tax is triggered as soon as they are allotted the shares. The taxable income is calculated as the difference between the fair market value (FMV) of each share on the exercise date and the price employees paid to buy each share. This amount is considered as income and taxed according to their regular income tax slab.

However, employees of eligible startups recognised by the Department for........

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