ESOP taxation as perquisites: 3 key issues and expectations from Budget 2026

Employee Stock Option Plans (ESOPs) enable employees to participate in the wealth creation journey of their employer company, and also bridge income inequalities. Ahead of Budget 2026 on February 1, industry bodies and experts have urged the government to make ESOP taxation easy for employees across sectors.

This article highlights the three key issues around ESOP taxation and suggestions for Budget 2026 by various bodies.

1. Deferment of perquisite tax across sectors

ESOPs are issued by employers to eligible employees. After the completion of the vesting period, ESOPs are vested with the employees. After that, employees can exercise such ESOPs with payment of the exercise price and, in turn, they receive shares of the employer company.

Taxability arises in the hands of employees on allotment of shares after the exercise of ESOPs. According to the Bombay Chambers of Commerce and Industry (BCCI), this leads to double cash outflow for the employees

• First, due to investment in the exercise price of the shares and

• Second, due to tax liability.

"In other words, this results in cash flow issues for employees as they are required to pay tax in the absence of any actual receipt of cash. This immediate tax obligation can cause financial strain and dissuade employees from exercising their options, impacting morale and retention," BCCI said in their pre-budget memorandum. They have suggested the following

The Finance Act 2020 allowed the deferment of taxation of ESOPs. But its scope is limited to only a few eligible startups.

For Budget 2026, experts at BCCI have suggested modifying the current provisions for deferral of perquisite tax payable on exercise of ESOPs. They have suggested deferring the payment of perquisite tax on ESOPs offered by any employer of all sectors without any qualifying conditions, whose securities are not listed, till the earliest of the following:

• 8 years from the date of exercise; or

• Liquidity event in respect of securities offered under ESOP, or

• Sale of securities acquired under an ESOP.

2. Clarity for cross-border employees

Divya Baweja, Partner at Deloitte, said Budget 2026 should provide clarity on the taxation of stock options for cross-border employees.

Under Section 17(2) of the Income-tax Act, Employee Stock Option Plans (ESOPs) are taxed as perquisites at the time of exercise.

"While this framework works for domestic employees, it does not address specific concerns for cross-border employees, particularly those who have rendered services both in India and abroad during the grant-to-vesting period."

He said that the absence of clear apportionment rules for ESOP taxation in cross-border scenarios leads to:

• Inconsistent treatment by assessing officers during scrutiny or assessments.

• Litigation and appeals, despite judicial support for apportionment based on service location.

• Hardship for mobile employees, including expatriates and returning Indians.

• Increased complexity due to rising cross-border assignments and remote work arrangements, where ESOPs are earned across multiple jurisdictions.

According to Baweja, this ambiguity undermines the fairness and predictability of tax treatment for globally mobile professionals. Therefore, he suggested that CBDT should issue clear guidelines for apportioning ESOP taxation in cross-border scenarios, including the following:

• A standard formula or method based on the location of services rendered during the grant-to-vesting period to determine the perquisite as well as the cost of acquisition.

• Documentation requirements for employees to substantiate service periods and locations.

• Alignment with international best practices to ensure consistency and reduce disputes.

3. Pro-rata taxation for mobile employees

The American Chamber of Commerce in India (AMCHAM) has said that the Income Tax Act should specifically provide for pro-rata taxation during the vesting period in respect of mobile employees who qualify as Non-Resident or NOR.

In their pre-budget memorandum, AMCHAM said, "Currently, stock options are subject to tax at the time of exercise of shares (excluding allotment of specified security by eligible start ups), taxable value being excess of fair value of shares over the exercise price.

"In case of mobile employees who qualify as NR or NOR, who exercise stock options, only pro-rata value in respect of days spent in India during the period grant to vest is subject to tax in India based on judicial precedent."

As the Act does not specifically provide for pro-rata taxation in respect of mobile employees, it leads to litigation with lower level authorities.

"It is recommended that the Act should specifically provide for pro-rata taxation during the vesting period in respect of mobile employees who qualify as NR or NOR," AMCHAM said.