Employee stock options taxation turns on fair market value rules, deferred perquisite charge, and later capital gains treatment.

Employee stock options and sweat equity shares are taxable as a perquisite when specified securities or sweat equity shares are allotted or transferred by an employer or former employer free of cost or at a concessional rate. Fair market value is determined on the exercise date by stock exchange prices for listed equity shares, by merchant banker valuation for unlisted shares, and by merchant banker valuation for specified securities other than equity shares. The perquisite is taxed in the year of allotment, disclosure is required in the return, later sale is taxed as capital gains, and non-compliance may attract interest, penalty, and prosecution.

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