Equity compensation is taxed once when you exercise, as salary at your slab rate, and again when you sell, as capital gains. The second computation starts from the exercise-date value, not from what you paid.
The mistake that costs the most is treating the whole gain as capital gains. Most of it usually is not.
On exercise, the difference between the fair market value and what you paid is a perquisite under Section 17(2)(vi). It is salary income, taxed at your slab — up to 30% plus surcharge and cess — and your employer deducts TDS on it under Section 192. There is no concessional rate and no exemption. People who model their ESOPs at 12.5% are usually mispricing the largest part of the bill.
When you later sell, the capital gain is measured from the FMV already taxed as perquisite, not from the exercise price you actually paid. Section 49(2AA) makes that explicit. This is what stops the same appreciation being taxed twice — and it is why keeping the exercise-date valuation on record matters years later.
Shares of a US or other foreign parent are not listed in India, so they need 24 months to qualify as long-term, not 12. Sell at 18 months and the gain is short-term, taxed at your slab rate. They also have to be reported in Schedule FA of your return — and a Schedule FA omission carries exposure under the Black Money Act quite separately from the tax on the gain.
Exercising creates a tax liability without creating any cash. For employees of an eligible start-up under Section 80-IAC, Section 192(1C) lets the employer defer TDS to the earliest of 48 months from the end of the relevant assessment year, the date of sale, or the date of leaving. The tax is deferred, not reduced — but it removes the position where you owe tax on shares you cannot yet sell.
The calculator does the arithmetic. TaxSphere — our free case-law library, 1,184 authorities and the Act in full — has the judgments, the circulars and the statutory text for the same provision.
