How to Use the ESOP Calculator
- Enter your grant details - Number of options, strike price from your grant letter
- Set current valuation - Ask HR for latest FMV or use last funding round price
- Select company stage - This affects risk calculation and dilution projection
- Vesting details - Standard is 4 years with 1-year cliff
- Review all scenarios - See what your ESOPs could be worth at different exit valuations
Understanding ESOP Taxation in India
Tax at Exercise (Perquisite Tax)
When you exercise your options, the difference between FMV and strike price is taxed as salary income:
Perquisite = (FMV at exercise - Strike Price) x Number of options exercised
Tax = Perquisite x Your income tax slab rate (up to 30%)
Tax at Sale (Capital Gains)
When you sell shares, the gain from exercise FMV to sale price is taxed:
Capital Gain = Sale Price - FMV at exercise
LTCG (12+ months): 12.5% above Rs 1.25 lakh
STCG (less than 12 months): 20%
Important: You pay perquisite tax even if you don't sell! You need cash to exercise options and pay tax, but you're getting illiquid shares in return. Plan accordingly.
ESOP Risk Factors
- Company may fail - Only 10% of seed-stage startups reach Series A
- Dilution - Your ownership decreases with each funding round
- Liquidity - You can't sell until IPO or secondary sale
- 409A valuations - May not reflect actual market value
- Exercise window - Short windows force difficult decisions when leaving
- Preference stack - Investors get paid first in most exits
Frequently Asked Questions
How are ESOPs taxed in India?
ESOPs are taxed twice: (1) At exercise - the spread between FMV and strike price is taxed as perquisite at your income tax slab rate. (2) At sale - the gain from exercise FMV to sale price is taxed as capital gains (12.5% LTCG if held 12+ months, 20% STCG otherwise).
What is ESOP dilution?
Dilution occurs when a company issues new shares during funding rounds. While your number of shares stays the same, your percentage ownership decreases. For example, if you own 1% and the company raises a round that creates 15% new shares, your ownership becomes approximately 0.85%.
Should I exercise my ESOPs early?
Early exercise makes sense if: (1) You strongly believe in the company's growth, (2) Current valuation is low so perquisite tax is minimal, (3) You want to start the 12-month holding period for LTCG treatment. However, you're risking real money on illiquid shares that may become worthless.
What happens to my ESOPs if I leave?
When you leave: (1) Unvested options are typically forfeited, (2) Vested options must be exercised within a window (usually 30-90 days), (3) If you don't exercise within this window, you lose them. Some employee-friendly companies offer extended exercise windows of up to 10 years.