Step-by-step: How to report ESOPs in your income tax return

Representative image

Why ESOP reporting matters

Employee Stock Option Plans (ESOPs) lead to tax at two points and misreporting may lead to mismatches, notices or interest. On exercising the options, the amount that you pay above the exercise price and the market value (FMV) at the date of exercise is taxed as a perquisite and is also a part of your salary — TDS is deducted by the employer on this.

Two tax occurrences: sale and exercise

First, at exercise, the notional gain (FMV - exercise price) is added to your annual salary and should reflect in Form 16. Second, if you sell the allotment shares, any gain (sale price - FMV on date of exercise) is considered as a capital gain; the holding period begins on the date of allotment. Cost of acquisition for tax purposes under capital gains is thus the FMV utilized at exercise. Based on whether the shares are listed or unlisted, and the holding period, the sale can have provisions of short-term or long-term capital gains.

Step 1 — gather documents and compute amounts

Collect your Form 16, employer letter stating perquisite calculation, allotment date, FMV used at exercise, exercise price, broker confirmations and sales statements. Form 16 should have perquisite value and TDS deducted, and if TDS not deducted or deducted less, you shall pay the shortfall while filing. In case of capital gains, calculate sale consideration, subtract FMV on exercise date as cost of acquisition, and classify gains as short- or long-term based on holding period.

Step 2 — where and how to provide details in ITR

Report ESOP perquisite as Income from Salary in your ITR (same value reported in Form 16). Report employer TDS in the tax credit block so that it's set off against tax on your return. Report ESOP share sale gains in the Capital Gains schedule; use FMV-at-exercise as your cost of acquisition and fill in dates accordingly. Report any foreign shares or overseas ESOPs under Schedule FA as and when required. Take filing instructions for salaried taxpayers with capital gains to refer to ITR-2 when you have capital gains or foreign assets.

End-of-period checks, unusual cases and accounting

Match TDS and reported income with balance Form 16, broker agreement statements, and bank statements. After exercising ESOPs of a notified start-up and availing deferral schemes, tax-deferral provisions are subject to certain conditions — verify eligibility and disclosure conditions before filing. Keep supporting documents (valuation, allotment letters, ledger entries) for at least eight years; these are usually sought in assessments. Short TDS? Pay extra tax and interest before filing to escape notices.

FAQs

Q1: What do I use as a cost to compute capital gains on ESOP stock?

Use the FMV at the time of exercise (the value upon which perquisite tax was computed) as the cost of acquisition while computing capital gains on sale.

Q2: If my employer failed to deduct TDS on exercise, what should I do?

You must compute the tax on the perquisite, pay the tax payable (and interest, if due), and show the payment or self-assessment tax challan along with your return to offset the amount.

Q3: Do I have to report foreign ESOPs differently?

Yes. Report foreign ESOP holdings and foreign income on Schedule FA and utilize DTAA/foreign tax credit rules where appropriate; retain detailed documentation to support valuation and foreign taxes withheld.