COURTKUTCHEHRY SPECIAL ON ESOPS AND IT’s TAX RULES
Yes Bank ESOP Allotment: Understanding Employee Stock Options and Tax Implications Before Selling
ESOPs Explained: How Employee Stock Options Work in India
Taxation Rules: What Employees Must Know Before Selling Shares
By Our Legal Reporter
New Delhi: January 25, 2026:
On January 23, 2026, Yes Bank announced the allotment of 3,45,283 equity shares through the exercise of its Employee Stock Option Scheme (ESOS 2020) and Restricted Stock Unit (RSU) Plan 2024. The bank realized over ₹42 lakh from these exercises, increasing its paid-up share capital and expanding the total outstanding shares.
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This corporate action highlights the growing importance of Employee Stock Option Plans (ESOPs) in India’s corporate landscape. ESOPs are not just a tool for employee motivation and retention but also a complex financial instrument with significant tax implications. For employees, understanding how ESOPs work and how they are taxed is essential before selling shares.
What Are ESOPs?
An Employee Stock Option Plan (ESOP) is a scheme under which companies grant employees the right to purchase shares at a predetermined price, often lower than the market value.
Key features:
- Grant: The company offers stock options to employees.
- Vesting Period: Employees must wait for a certain period before exercising options.
- Exercise: Employees buy shares at the exercise price.
- Sale: Employees may later sell shares in the open market.
ESOPs serve as a retention tool, aligning employee interests with company performance. They are widely used in banks, IT firms, and startups.
Taxation of ESOPs in India
Taxation occurs at two stages:
1. At Exercise (Perquisite Tax)
- When employees exercise ESOPs, the difference between the Fair Market Value (FMV) on the exercise date and the exercise price is treated as a perquisite under the head “Salaries.”
- Employers deduct TDS on this perquisite.
- For eligible startups, tax payment can be deferred.
2. At Sale (Capital Gains Tax)
- When employees sell shares, the difference between the sale price and the FMV on exercise date is taxed as capital gains.
- Short-Term Capital Gains (STCG): If shares are sold within 12 months, taxed at 15%.
- Long-Term Capital Gains (LTCG): If sold after 12 months, taxed at 10% above ₹1 lakh.
Example: Yes Bank ESOP Allotment
Suppose an employee exercised options at ₹12 per share when the FMV was ₹20.
- Perquisite Tax: ₹8 per share (₹20 – ₹12) taxed as salary.
- If later sold at ₹30 per share:
- Capital Gain: ₹10 per share (₹30 – ₹20).
- Tax depends on holding period (STCG or LTCG).
This shows why employees must plan carefully before selling ESOP shares.
Why Understanding Tax Laws Matters
Employees often underestimate the tax burden of ESOPs. Key considerations:
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- Double Taxation: ESOPs are taxed twice—at exercise and sale.
- Cash Flow Issues: Employees may face tax liability even before selling shares.
- Market Risks: Share prices may fall after exercise, leaving employees with losses but still liable for perquisite tax.
- Strategic Timing: Holding shares for more than 12 months can reduce tax liability.
Legal Framework
ESOPs in India are governed by:
- Companies Act, 2013
- SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021
- Income Tax Act, 1961
These laws ensure transparency, protect employee rights, and define tax obligations.
Broader Significance
The Yes Bank allotment reflects a larger trend:
- Employee Empowerment: ESOPs give employees ownership in the company.
- Corporate Strategy: Firms use ESOPs to retain talent and align interests.
- Tax Complexity: Employees must understand tax laws to avoid surprises.
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Expert Opinions
- Tax Consultants: Advise employees to consult professionals before exercising ESOPs.
- Corporate Lawyers: Stress compliance with SEBI regulations.
- Financial Advisors: Recommend timing sales to optimize tax liability.
Conclusion
The Yes Bank ESOP allotment highlights both the opportunities and challenges of employee stock options. While ESOPs empower employees and align them with company growth, they also carry complex tax implications. Employees must understand perquisite taxation, capital gains rules, and timing strategies before selling shares.
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