ESOP vs RSU: When Tax Is Due and the Cash You Need

What the 2025 Act says, and what it leaves to the Rules

Section 17(1)(d) of the Income-tax Act, 2025_Bill.pdf) makes specified securities or sweat equity allotted free or at a concession a perquisite. Section 17(4)(h) values it at FMV on the date of exercise, minus the amount you paid or recovered. FMV is set by the method the Rules prescribe. Your employer computes it, reports it as salary and deducts TDS on it under section 392(1). The figures below are for tax year 2026-27 (1 April 2026 to 31 March 2027) under the new regime, using the department's slab page.

For RSUs, we have not verified which date the Rules use for valuation, or how foreign-listed shares are valued. Ask your employer's equity-plan tax note for both. The worked RSU example uses a single hypothetical value, not a rule.

Worked example: exercising 2,000 options

• Salary: ₹25,00,000 gross, so total income before the ESOP is ₹24,25,000, already in the 30% slab.
• Options: 2,000 at an exercise price of ₹50.
• FMV on the exercise date (hypothetical): ₹650.

Total income becomes ₹36,25,000, still under ₹50,00,000, so there is no surcharge. Double the grant and income crosses ₹50,00,000. Then a 10% surcharge applies and the arithmetic changes.

If the company is unlisted and has no buy-back window, you cannot sell shares to fund that ₹4,74,400. That is the real ESOP risk: you pay tax in rupees on a value you cannot yet turn into rupees.

Worked example: 500 RSUs vesting

RSUs are typically allotted without payment, so there is no exercise price. Assume the plan values each share at ₹1,800 for tax.

If the plan does not withhold shares, payroll recovers the ₹2,80,800 of TDS from your cash salary. That can take most of a month's pay in the vesting month. Ask which method applies.

# Synthetic grants. New regime, 30% slab, no surcharge, tax year 2026-27.
import math

RATE = 0.30 * 1.04

def esop_cash(options, strike, fmv):
    perquisite = options * (fmv - strike)
    tax = perquisite * RATE
    return {"exercise": options * strike, "perquisite": perquisite,
            "tax": round(tax), "cash_needed": round(options * strike + tax)}

def rsu_cover(units, value):
    tax = units * value * RATE
    withheld = math.ceil(tax / value)
    return {"tax": round(tax), "withheld": withheld, "kept": units - withheld}

print(esop_cash(2000, 50, 650))
print(rsu_cover(500, 1800))
# Exercising 1,000 now halves this year's cash need, if FMV is unchanged
print(esop_cash(1000, 50, 650))

The rate is fixed at 30% because both examples sit above ₹24,00,000 of income. At lower incomes, compute the tax by slab, as the function in the old-vs-new regime break-even does.

Choosing when to exercise

Splitting an exercise across two tax years halves each year's cash need. But the FMV on the second date is unknown, and an exercise after 31 March 2027 falls in tax year 2027-28, whose rates are not yet known. If the FMV has risen, the second year's perquisite is larger. If you wait, the perquisite rises with the FMV; exercising early fixes it at a lower value but puts cash at risk sooner. Neither choice is free. Write down the exit or buy-back route you are counting on before you pay anything.

Comparing grants across offers

Treat equity as a separate column with its own cash outflows, not as part of CTC. An offer that says "₹10,00,000 in ESOPs" has told you nothing until you know the strike price, the vesting schedule, the latest FMV method and the route to liquidity. Comparing two offers over three years shows where to put equity in the projection.

Our FDE for Professionals programme is on a proposed schedule for experienced engineers targeting client-facing AI roles, where equity is often part of the offer. Eligible learners who meet the attendance and capstone criteria receive assured job interviews through our hiring network.