The perquisite value of ESOP shares — the difference between the fair market value at exercise and the exercise price — is taxable as salary at exercise under s.17(2)(vi) of the Income-tax Act 1961, and the employer deducts TDS on it. There is no tax at grant in most cases because the option itself has no readily ascertainable FMV at grant.

Under s.392(3) read with s.289(3) of the Income-tax Act 2025 (formerly s.80-IAC-related provisions, effective for DPIIT-recognised startups), the perquisite tax at exercise can be deferred to the earliest of: the sale of the shares, 60 months from the end of the financial year of allotment, or the employee leaving the company — saving employees of funded startups a large cash TDS hit at exercise. The startup must file the prescribed form and report deferred tax annually.

For unlisted shares, the FMV for perquisite taxation is computed per Rule 3(8) of the Income-tax Rules 1962 — the book value method — or a merchant banker's valuation, and the same value becomes the cost of acquisition for later capital gains. The visualizer uses this basis so the exercise-year tax and the eventual sale tax are consistent.

Unlisted shares held for 24+ months are long-term capital assets, taxed at 12.5% without indexation under s.112 of the Income-tax Act 1961 as amended by the Finance Act 2024 (effective 23 July 2024). Short-term gains on unlisted shares are taxed at your slab rate. The visualizer applies both depending on your holding period.

The DPIIT startup deferral (s.392(3)) is a cash-flow benefit at exercise, not an exemption — the tax is still eventually payable. Beyond that, the capital-gains and perquisite rules apply as for any company. The visualizer models both the deferred path and the regular path so an employee can compare the timing of the tax hit.