ESOP wealth of Rs 1 crore may leave only Rs 59 lakh in hand

Livemint reports that employee stock options (ESOPs) can create significant wealth, but the headline value of Rs 1 crore does not translate into the same amount in an employee's bank account. The actual take-home depends on the exercise price, fair market value at exercise, holding period, and listing status. In a detailed illustration by tax head Parag Jain of 1 Finance, an employee whose ESOPs are eventually sold for Rs 1 crore could be left with roughly Rs 59 lakh to Rs 68 lakh after accounting for exercise costs, perquisite tax, and capital gains tax.

The first cash outflow occurs before any shares are sold: an employee must pay the exercise price (assumed Rs 10 lakh) and perquisite tax (assumed Rs 17.16 lakh for top-slab earners), totalling Rs 27.16 lakh. The eventual sale proceeds are then reduced by capital gains tax, which varies from 12.5% for long-term holdings to slab rates for short-term unlisted shares. Additional costs such as brokerage, securities transaction tax, and interest on borrowed exercise funds can further reduce the payout.

Livemint notes that a second article highlights risks for startup employees: exercising ESOPs requires large upfront capital, and if a liquidity event like an IPO is delayed or happens at a lower valuation, employees may not recover their costs. The example of Zepto, which approved an interest-free loan of about Rs 700 crore to help employees exercise options at a $7 billion valuation, while the IPO is now discussed at around $3 billion, illustrates these risks.