ESOP tax rules for ITR filing: Know when salary tax and capital gains apply to avoid costly reporting mistakes

ESOPs are taxed at exercise when the difference between fair market value (FMV) and exercise price is treated as salary income, and later at sale as capital gains based on appreciation after exercise.

For unlisted company ESOPs, FMV must be determined per prescribed valuation rules, and employees should keep proper valuation documents for accurate reporting.

The FMV at exercise becomes the cost of acquisition for calculating capital gains or losses on the eventual sale of ESOP shares.

ESOP income at exercise is typically reflected in Form 16, with the employer deducting applicable tax, but employees must ensure correct reporting when filing ITR for AY 2026-27.