Vesting alone does not create tax: you are taxed twice, once when you exercise the options and again when you sell the shares.
At exercise, the difference between the share's fair market value and the price you pay is treated as part of your salary. It is taxed at your slab rate, and your employer deducts tax for it. This can mean a tax bill on shares you have not sold and may not be able to sell yet.
When you later sell, the gain over that fair market value is a capital gain. The holding period starts from the date you exercised, not the grant or vesting date, and it decides whether the gain is short-term or long-term.
Some employees of eligible startups can defer the tax due at exercise for a set period, or until they sell or leave the company. Whether your company qualifies is something to confirm with your employer.
A few practical points:
- Do not exercise more than you can afford to pay tax on.
- Plan exercises across financial years to spread the tax.
- Be careful about how much of your wealth sits in one company's shares.
Our ESOP tax guide has a worked example.
Your own answer depends on your company, the number of options and your cash needs. If you want someone to look at your numbers, you can book a free call.