ITR Filing for Salaried Individuals with ESOPs: Form to Use
- Farheen Mukadam
- Jul 22, 2025
- 8 min read
Filing Income Tax Returns (ITR) can be complex for salaried individuals, especially if they receive Employee Stock Options (ESOPs). ESOPs are a valuable part of many compensation packages, but they come with unique tax implications. Understanding how to report these stock options and which ITR form to use can be a daunting task. However, it is essential for tax compliance and to ensure you're not overpaying or underpaying taxes. Let us understand the necessary steps for filing ITR for salaried individuals with ESOPs, including the correct ITR form, how to report ESOPs, and common mistakes to avoid.
Table of Contents
Which ITR Form Should Salaried Individuals with ESOPs Use?
Salaried individuals receiving ESOPs should use ITR-2 or ITR-3, depending on their specific situation.
ITR-2 is applicable for individuals who do not have business income but have other sources of income such as salary, capital gains, or income from other investments. If you are a salaried employee who has ESOPs but no business income, ITR-2 would be the correct form for filing your taxes.
ITR-3 is for individuals who have income from a business or profession along with other sources of income. If you are a salaried employee with ESOPs and also run a business, you will need to file ITR-3.
Choosing the right form is essential to ensure that the ESOP-related income is reported correctly. Incorrect filing could lead to the rejection of your return or penalties.
ESOP Taxation: What to Report and Where
The tax treatment of ESOPs is unique and depends on when you exercise the options and when you sell the shares. ESOPs are generally taxed at two stages:
At the time of exercise: When you exercise your ESOPs, the difference between the market price of the shares and the exercise price is treated as taxable income under Income from Salary. This amount should be reported under "Salary" income in your ITR.
At the time of sale: When you sell the shares, any capital gain (i.e., the difference between the sale price and the market value on the exercise date) is subject to Capital Gains Tax. Depending on how long you hold the shares, the gain can either be classified as short-term or long-term capital gain.
Short-Term Capital Gains (STCG): If the shares are sold within three years of exercising the options, the gains are considered short-term and taxed at 15%.
Long-Term Capital Gains (LTCG): If the shares are sold after three years, any gains exceeding ₹1 lakh per financial year will be taxed at 10% without the benefit of indexation.
You should report the salary income from ESOPs under the "Income from Salary" section in ITR-2 or ITR-3, and capital gains from selling the shares under the "Capital Gains" section.
Step-by-Step: How to File ITR for ESOPs
Filing ITR for ESOPs requires careful reporting of both salary income and capital gains. Follow these steps:
Collect your documents: Gather all documents related to your ESOPs, including the stock options agreement, exercise price, date of exercise, sale date, and sale proceeds. You will need these to calculate your income from salary and capital gains.
Report Salary Income from ESOPs: In the ITR form, navigate to the section for "Income from Salary." Enter the income generated from exercising your ESOPs (market price minus exercise price). This income will be included in your overall salary and taxed accordingly.
Report Capital Gains from Sale of ESOPs: If you sold your ESOP shares, you need to report the capital gains. Navigate to the "Capital Gains" section of the ITR form and report the sale proceeds, subtracting the market value at the time of exercise (if applicable). Determine whether the capital gain is short-term or long-term and calculate the tax accordingly.
Verify TDS and Deductions: Ensure that the TDS (Tax Deducted at Source) on your salary income is correctly reflected in your Form 26AS. If TDS is deducted, it should match the amounts shown in your ITR.
Submit the ITR: Once all the information is entered accurately, file your return. Make sure to double-check your numbers and attach any supporting documents if required. Submit your ITR and keep a copy for your records.
Common Mistakes to Avoid
When filing ITR for ESOPs, there are several common mistakes that taxpayers often make:
Incorrect Reporting of Salary Income: Sometimes, the income from exercising ESOPs is not correctly reported under salary income, leading to discrepancies and potential penalties.
Misreporting of Capital Gains: It’s crucial to report capital gains accurately based on the holding period (short-term or long-term). Not doing so can lead to incorrect tax calculations.
Not Accounting for TDS: Failure to match the TDS reflected in Form 26AS with the reported income can result in incorrect tax filing and lead to penalties or delayed refunds.
Forgetting to Include All ESOP-Related Transactions: If you have received ESOPs from multiple employers or have exercised options at different times, make sure all relevant transactions are reported in your ITR.
Missing Deadlines: Ensure you file your return within the due dates to avoid penalties and interest on unpaid taxes.
How TaxBuddy Can Help
TaxBuddy offers a seamless platform to help you file ITR for ESOPs, ensuring that all income from salary and capital gains are accurately reported. The platform simplifies the process by guiding you through the various steps and helping you select the right ITR form. TaxBuddy also verifies TDS, provides accurate calculations for capital gains tax, and ensures compliance with the latest tax regulations. With expert assistance available, you can avoid mistakes and ensure a hassle-free filing experience.
Conclusion
Filing ITR for ESOPs can be complex, but understanding the correct form, how to report your income, and the necessary steps to follow can make the process smoother. By accurately reporting both your salary income from ESOPs and capital gains, you ensure compliance with tax laws and avoid penalties. If you need help navigating the complexities of ESOP taxation and ITR filing, platforms like TaxBuddy offer expert guidance and a user-friendly interface to simplify the process.
FAQs
Q1: Which ITR form should I use if I have ESOPs?
If you are a salaried individual with Employee Stock Ownership Plans (ESOPs), you will generally need to file either ITR-2 or ITR-3, depending on your other sources of income.
ITR-2 is for individuals who do not have business income but have capital gains, income from salary, or other sources.
ITR-3 is for individuals who have business income along with income from salary or capital gains. Choosing the correct form ensures that you report your ESOP income accurately, avoiding complications or delays in processing your return.
Q2: How do I report ESOP income in my ITR?
To report your ESOP income, you need to divide it into two sections:
Income from Salary: The amount received upon exercise of the ESOPs is treated as part of your salary income. This is the taxable component at the time of exercise.
Capital Gains: When you sell the shares received from the ESOPs, the gains are treated as capital gains. If the shares are sold within 36 months, it’s short-term capital gain; if sold after 36 months, it’s long-term capital gain.
Ensure you have all the necessary documents like the ESOP grant letter, exercise price, and sale details for accurate reporting.
Q3: Are ESOPs taxed at the time of exercise or sale?
Yes, ESOPs are taxed at both stages:
At the time of exercise: The difference between the fair market value (FMV) of the shares on the exercise date and the exercise price is taxed as Salary Income. This amount is subject to tax as per your income tax slab.
At the time of sale: The capital gains are calculated as the difference between the sale price and the FMV on the exercise date. This is taxed as either short-term or long-term capital gains, depending on the holding period.
Both stages of taxation need to be reported to ensure accurate tax filing.
Q4: What are the tax rates for short-term and long-term capital gains from ESOPs?
Short-term capital gains (STCG): If the ESOP shares are sold within three years of exercise, the gains are considered short-term and are taxed at 15%.
Long-term capital gains (LTCG): If the shares are sold after three years, the gains are considered long-term and are taxed at 10% if the total LTCG exceeds ₹1 lakh in a financial year. Any gains below ₹1 lakh are exempt from tax.
It’s important to calculate the holding period of the shares correctly to determine whether the gains are short-term or long-term.
Q5: Can I claim deductions for ESOPs?
No, you cannot claim deductions directly for ESOPs under sections like 80C, 80D, etc. The income from ESOPs is taxed as Salary Income at the time of exercise, and Capital Gains when sold. However, certain expenses related to the shares, like brokerage fees, can be considered in the calculation of capital gains.
While you cannot claim deductions specifically for ESOPs, there may be other deductions available for tax-saving investments that you should explore during your ITR filing.
Q6: What are common mistakes to avoid when filing ITR for ESOPs?
Common mistakes when filing ITR for ESOPs include:
Incorrect Reporting of Salary Income: Ensure that the income from ESOP exercise is accurately reported as salary income, based on the FMV on the exercise date.
Misclassification of Capital Gains: Capital gains should be reported correctly as short-term or long-term, based on the holding period of the shares.
TDS Mismatch: Cross-check that the TDS amount deducted on your ESOP income is correctly reflected in your Form 26AS to avoid discrepancies.
Late Filing: Missing the filing deadline may lead to penalties. File your return on time to avoid delays and fines.
Accurate reporting helps ensure that you do not face penalties or audits later.
Q7: How can TaxBuddy assist with filing ITR for ESOPs?
TaxBuddy provides step-by-step guidance to help you accurately report ESOP income. The platform helps in identifying the correct ITR form to use and ensures that your salary income and capital gains are reported correctly. TaxBuddy also assists with TDS verification and tax calculation, helping you avoid common filing errors. The platform’s expert assistance can also help you address complex aspects of ESOP taxation, ensuring timely and error-free filing.
Q8: What happens if I miss reporting my ESOP income?
If you fail to report your ESOP income accurately, it may lead to penalties, interest on unpaid taxes, or even a tax audit. The tax authorities may scrutinize your returns if discrepancies are found, especially in cases where large amounts of income from ESOPs are not reported. Additionally, failure to report capital gains from the sale of ESOP shares could result in missed tax opportunities or additional scrutiny during tax audits.
It’s crucial to report your ESOP income correctly to avoid these consequences.
Q9: Can I revise my ITR if I made a mistake in reporting ESOP income?
Yes, you can file a revised return if you made an error in reporting your ESOP income. A revised return can be filed any time before the end of the relevant assessment year. It’s advisable to correct any discrepancies as soon as possible to avoid penalties and interest charges. Ensure that you report both the salary income from the ESOP exercise and the capital gains from the sale correctly in the revised return.
Q10: How do I handle ESOPs from multiple employers in the same financial year?
If you receive ESOPs from multiple employers in the same financial year, you must report each grant separately under the "Income from Salary" section of your ITR. Additionally, ensure that the capital gains from the sale of shares obtained through each employer’s ESOP scheme are reported separately under the "Capital Gains" section. It’s crucial to maintain detailed records of each grant, including the exercise price and FMV on the exercise date.
Q11: Are ESOPs applicable to all types of employees?
ESOPs are generally offered by companies, especially startups, to attract and retain talent. Not all companies provide ESOPs; they are typically offered to key employees, executives, or founders as part of their compensation package. If your company offers ESOPs, the terms and conditions will be outlined in the ESOP plan, and you will need to report the associated income during tax filing.
Q12: Is there a way to minimize the tax impact of ESOPs?
While there is no direct deduction available for ESOPs, there are strategies to minimize the tax impact:
Hold Shares for Longer: To reduce short-term capital gains, consider holding onto your shares for over three years to qualify for long-term capital gains (LTCG), which are taxed at a lower rate.
Tax Planning: Work with a tax consultant to explore tax planning strategies that could help optimize your overall tax liability, including using exemptions or deductions available under other sections, like Section 80C or 80D.
