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Offer shares to your employees, making them part-owners in the success of your startup.

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Find the best plan for your needs

Basic Plan

₹ 19,999
+GST
  • Company Name Approval
  • DIN for 2 Directors
  • DSC for 2 Directors
  • Company Incorporation Certificate
  • AOA & MOA
  • INC – 12 Filing
  • Company E-PAN & E-TAN
  • Company Master Data
  • Current Account Opening Support
  • Electronic Certificate Delivery

Standard Plan

₹ 23,999
+GST

Basic Plan
+

  • MSME/Udyam Registration
  • INC-22 Filing
  • Auditor Appointment
  • Issuance of share certificates
  • Hard Copy Certificate Delivery

Premium Plan

₹ 49,999
+GST

Standard Plan
+

  • 12A & 80G Registration
  • FCRA Registration
  • Shops & Establishment License
  • INC 20A Filing
  • GST Registration
  • Business Letterhea(10 copies)
  • Company Seals
Note: Government fees for incorporation are additional and vary by state. T&C

Overview

An Employee Stock Ownership Plan (ESOP) is a way for companies to reward employees by giving them a chance to own company shares. This helps employees feel more connected to the company’s success. In India, ESOPs are regulated by laws like the Companies Act, 2013, SEBI Regulations, and the Income Tax Act, 1961.

This guide explains everything you need to know about ESOPs—who is eligible, how they work, tax rules, and legal requirements.

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What Laws Apply to ESOPs

ESOPs in India are primarily governed by the following laws and regulations

Why ESOPs Are Beneficial

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Employee Retention and Motivation

Encourages long-term commitment.

Boosts Productivity

Employees feel motivated as they have a stake in the company’s success.

Creates Wealth for Employees

Employees benefit from the company’s growth.

Tax Benefits for Companies

ESOP expenses can be claimed as a deduction under the Income Tax Act.

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How ESOPs Work

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  • Employees eligible for ESOPs are defined by the company’s board and shareholders.
  • As per SEBI regulations, ESOPs cannot be issued to:
      • Independent directors
      • Promoters or those holding more than 10% of the company’s equity in listed companies.
  • Grant Date – The date when the company offers ESOPs to employees.
  • Vesting Period – The minimum one-year period employees must wait before exercising ESOPs, as per Rule 12(6) of the Companies Rules.
  • Vesting Conditions – Based on years of service, performance, or other company policies.
  • After the vesting period, employees can buy shares at a pre-decided price (exercise price).
  • Exercise Price: Defined at the time of grant and is typically lower than the market value.
  • Exercise Period: A specified duration within which employees can purchase the shares.
  • Employees may have to wait for a certain period before selling their shares, depending on company policy.
  • If they sell shares, capital gains tax is applied.
  1. At the Time of Exercise (Buy Shares)
      • ESOPs are considered a perquisite and taxed under Section 17(2)(vi) of the Income Tax Act.
      • The tax is calculated as (Fair Market Value – Exercise Price) × Number of Shares.
      • Employers are required to deduct TDS under Section 192.
  1. At the Time of Sale

Capital gains tax is applicable on the sale of ESOP shares

      • Short-Term Capital Gains (STCG) – If sold within one year, taxed at 15% (for listed shares).
      • Long-Term Capital Gains (LTCG) – If held for more than one year, taxed at 10% (if gains exceed ₹1 lakh) for listed shares.

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Compliance & Approval Process

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For Listed Companies (Stock Market Listed)

      • Must follow SEBI (SBEB & SE) Regulations, 2021.
      • Companies need to disclose ESOP details in their annual reports.

For Unlisted Companies

      • Must follow Companies Act, 2013 rules.
      • The Fair Market Value (FMV) of shares should be determined by a Registered Valuer.

Board & Shareholder Approvals

Special Resolution: Required for issuing ESOPs as per Section 62(1)(b) of the Companies Act, 2013.

Approval of Plan: The ESOP scheme must be approved by shareholders before implementation.

Frequently Asked Questions

What is an ESOP?

An ESOP (Employee Stock Ownership Plan) is a program that provides a company's workforce with an ownership interest in the company through stock ownership, often at no upfront cost to the employees.

How does an ESOP benefit employees?

ESOPs offer employees a chance to gain shares in the company, which can increase in value, thus potentially providing significant financial benefits. They also enhance employee engagement and loyalty.

What are the advantages for employers offering ESOPs?

For employers, ESOPs are useful tools for attracting and retaining talented employees, aligning employees’ interests with business goals, and potentially offering tax advantages.

Who is eligible for ESOPs?

Eligibility criteria for ESOPs are determined by the company and can vary widely. Typically, they include tenure requirements, role-specific criteria, and sometimes performance metrics.

How are ESOPs granted to employees?

ESOPs are granted through an ESOP agreement, which details the number of shares, vesting schedule, and other terms. Shares are usually granted through options that convert to stock once vested.

What is a vesting period?

A vesting period is the time an employee must work at the company before gaining full ownership of the stock options. If an employee leaves before the vesting period is complete, they typically forfeit unvested options.

Can ESOPs be customized for different employee groups?

Yes, companies can tailor ESOP policies to different groups of employees, offering varied vesting schedules, quantities of shares, and other terms based on seniority, performance, and other factors.

What happens to ESOPs if an employee leaves the company?

If an employee leaves before shares are vested, they generally forfeit those shares. Vested shares can be retained or sold back to the company, depending on the company's ESOP policy.

Are there any tax implications for employees with ESOPs?

Yes, employees may face tax implications upon receiving shares or selling them. The specifics depend on local tax laws and the structure of the ESOP.

How can a company start an ESOP?

To start an ESOP, a company needs to establish a formal plan that defines the rules for the allocation of stock to employees, the vesting schedule, and how and when employees can exercise their options or sell shares.

Who can get ESOPs?

  • Permanent employees, including those of subsidiaries.
  • Independent directors and promoters (in listed companies) are not eligible.

What is the minimum waiting period before ESOPs can be exercised?

One year from the grant date, as per Rule 12(6) of the Companies Rules.

How are ESOPs taxed?

  • At Exercise: Taxed as a perquisite under Section 17(2)(vi).
  • At Sale: Taxed under capital gains (STCG or LTCG).

Do startups get special tax benefits for ESOPs?

Yes, eligible startups under Section 80-IAC of the Income Tax Act can defer ESOP tax for 5 years.