Radhika Gupta, managing director and CEO of Edelweiss Mutual Fund, has called for changes to India’s ESOP taxation rules, arguing that employees should be taxed only when they realise actual gains by selling their shares.
“One of the biggest problems with ESOP taxation in India is that employees are often taxed before they actually make money, or in other words we treat paper wealth as real liquidity,” she said in a X (formerly Twitter) post on Friday.
Gupta’s remarks came in response to investor Vijay Kedia’s suggestions on reforming India’s tax framework. She urged finance minister Nirmala Sitharaman to review the taxation of employee stock ownership plans (ESOPs), particularly for employees of unlisted companies.
How are ESOPs taxed in India? Gupta weighs in
Under the current taxation framework, are taxed at two stages, Gupta noted, outlining the details.
First, when an employee exercises the stock option, the difference between exercise price and the fair market value (FMV) of the shares is treated as a perquisite and taxed as part of the employee’s salary income.
A second tax liability arises when the employee eventually shares the shares. Any appreciation in value between the FMV on the exercise date and the sale price is taxed as capital gains.
As per income tax rules, sale of listed attract long-term capital gains when held for more than one year, which is then taxable at 12.5% on gains exceeding ₹1.25 lakh. If sold within one year, they are considered as short-term capital gains and taxed at 20%.
Meanwhile unlisted, long term capital gains are taxed at 12.5% and short term is taxed according to the holder’s slab rates.
‘The bigger issue’
According to Gupta, the bigger issue is not even double taxation in principle. The bigger issue is timing and liquidity.
“In listed companies, at least there is a market price and an ability to sell. But in unlisted companies, employees are often asked to pay tax on a notional value determined by a valuation exercise without liquidity, without certainty of eventual value, and sometimes without any exit timeline at all,” she noted.
Highlighting the core issue, she added, “Imagine paying lakhs in tax for shares you cannot sell. Or worse, paying tax on a valuation that may never fully materialise.”
How this creates a ‘strange’ asymmetry
Gupta argues that the current framework creates a mismatch in how different stakeholders are taxed. While founders and investors are generally taxed when they eventually sell their shares and realise gains, employees have to face a at the time they exercise their ESOPs, which is much earlier.
“Founders and investors are rewarded for long-term risk capital, but employees are sometimes taxed upfront on unrealised outcomes,” she wrote on X.
She further noted that this mismatch matters because ESOPs are not just compensation anymore. “They are increasingly the bridge through which employees participate in wealth creation,” she said.
Towards the end of her detailed post, she argued that if India genuinely aims to build an ownership economy, deepen startup talent, and create long-term alignment between companies and employees, the tax framework has to evolve with that ambition.
In her view, a more sensible system would tax employees when liquidity is created not merely when options are exercised.