Your ESOPs may be worth ₹1 crore. But how much will you actually take home? | ESOP cash out explained

For employees at startups and other companies offering employee stock options, an ESOP grant can become a meaningful part of their wealth. But a ₹1 crore value attached to those shares does not necessarily translate into ₹1 crore in the employee’s bank account when they eventually cash out.

The amount an employee actually takes home depends on what they paid to exercise the options, the fair market value (FMV) of the shares when they exercised them, how long they held the shares and whether the shares were listed or unlisted.

“Four variables decide the outcome, and the ₹1 crore headline is not one of them,” said Parag Jain, tax head at 1 Finance.

In Jain’s illustration, an employee whose ESOPs are eventually sold for ₹1 crore could be left with roughly ₹59 lakh to ₹68 lakh. The difference of nearly ₹9 lakh comes largely from the holding period and the resulting tax treatment.

The first cash outflow comes before the shares are sold

The exercise price is the cash an employee has to pay out of pocket before owning the shares.

Jain’s example assumes an exercise price of ₹10 lakh and an FMV of ₹60 lakh on the exercise date.

The taxable perquisite is the FMV on the exercise date minus the exercise price, multiplied by the number of shares. In this case, the perquisite is ₹50 lakh.

The perquisite is added to salary income and taxed at slab rates. The employer deducts TDS on it under Section 392 of the Income Tax Act, 2025.

For an employee whose other income already places them in the top slab, Jain’s illustration assumes 30% tax, 10% surcharge and 4% cess, resulting in tax of about ₹17.16 lakh.

This means the employee has to account for:

• ₹10 lakh exercise price
• ₹17.16 lakh tax at exercise
• ₹27.16 lakh total cash outflow before any sale

The effective rate changes with total income. Above ₹1 crore, the surcharge rises to 15%, taking the effective rate to about 35.88%. An employee whose other income is modest will pay less because part of the perquisite fills the lower tax slabs.

The catch is that the ₹27.16 lakh is payable whether or not a single share has been sold.

This can create a significant cash-flow problem for employees of unlisted companies, who may have to pay the tax while holding shares they cannot immediately liquidate.

A ₹1 crore sale can leave an employee with ₹59-68 lakh

When the shares are eventually sold, the cost base is the FMV at the time of exercise, not the exercise price, Jain said.

In the example, the shares had an FMV of ₹60 lakh at exercise and are eventually sold for ₹1 crore. The resulting gain is therefore ₹40 lakh.

The amount the employee ultimately retains varies depending on whether the shares are listed or unlisted and how long they were held.

Jain’s illustration gives four scenarios:

So, in Jain’s example, the employee could ultimately take home roughly ₹59 lakh to ₹68 lakh, even though the shares are sold for ₹1 crore.

“The spread of nearly ₹9 lakh comes almost entirely from the holding period,” Jain said. “What separates the two ends is not the value created. It is when the employee sells.”

The costs that can further reduce your ESOP payout

Tax is not the only cost employees need to consider when they cash out.

For listed shares, Jain said six transaction costs can apply: brokerage, Securities Transaction Tax (STT) of 0.1% on the sell side, exchange transaction charges, SEBI turnover fees, depository participant charges levied per scrip on every sell instruction, and 18% GST on brokerage and transaction charges.

Three other costs are often missed and can have a bigger impact.

Funding the exercise: Employees who borrow money to pay the exercise price and TDS have to bear interest until they can sell the shares. Jain said this interest is not deductible against the perquisite.

Unlisted secondary-market discount: A ₹1 crore paper valuation does not necessarily mean an employee can sell the shares for ₹1 crore. Where there is no exchange, buyers price in illiquidity, so an unlisted secondary transaction can take place below the headline valuation.

Advance-tax exposure: A large ESOP perquisite can push an employee’s total tax liability beyond what employer TDS covers, particularly when the employee has other income. The shortfall carries interest and may surface only when the employee files their tax return.

For employees, therefore, the headline ESOP value is only one part of the picture. The exercise price, tax at exercise, holding period, listing status, capital-gains tax and the costs of selling determine how much of that ₹1 crore actually becomes cash in hand.