An ESOP lets a company grant its employees the right to buy its shares at a fixed price after a vesting period, aligning their reward with the company’s growth. Setting one up needs a scheme, a special resolution of the shareholders, and the right MCA filings, and the tax falls at two points, on exercise and on sale. Samkhya helps you design and implement your ESOP correctly.
An Employee Stock Option Plan (ESOP) gives employees the option to buy the company’s shares at a pre-set price after they have served a vesting period, and is governed for an unlisted company by Section 62(1)(b) of the Companies Act, 2013 with Rule 12, and for a listed company by the SEBI (SBEB and Sweat Equity) Regulations, 2021. An ESOP runs through four stages, grant, vesting, exercise, and sale, with a mandatory minimum one-year gap between grant and the first vesting. Setting one up requires an ESOP scheme, approval by a special resolution of the shareholders, and filing MGT-14, after which options are granted; on exercise, shares are allotted and PAS-3 is filed. Promoters and large shareholders cannot ordinarily be granted options, except in DPIIT-recognised startups for the first ten years.
ESOPs are a powerful tool:
An ESOP moves through four stages:
Putting an ESOP in place needs:
Options may be granted to:
An ESOP is put in place by first drafting the ESOP scheme and having the board approve it and call a general meeting. The shareholders pass a special resolution approving the scheme and the maximum options, and the company files MGT-14 within 30 days, a step that must be completed before any options are granted. Options are then granted to eligible employees, vest after the agreed period (at least one year), and are exercised by the employee paying the exercise price. For an unlisted company, the exercise price and the perquisite value rest on a fair valuation by a Category I merchant banker. On exercise, the company allots the shares and files PAS-3, and records the options in the ESOP register.
For Setting Up:
For Operation:
Implementing an ESOP follows a clear sequence:
Setting up your ESOP with Samkhya Corporate Services is simple. Just follow these easy steps:
From there, our team drafts the scheme, the resolution, and the filings.
An ESOP needs ongoing compliance:
An ESOP is taxed at two points. First, at exercise, the difference between the fair market value of the shares and the exercise price is taxed as a perquisite in the employee’s salary at slab rates, and the employer deducts TDS on it. Second, at sale, the gain over the fair market value taken at exercise is taxed as a capital gain, with the holding period counted from the date of allotment, for unlisted shares, long-term gains (held over 24 months) are taxed at 12.5% without indexation, and short-term gains at slab rates. To ease the cash-flow burden at exercise, DPIIT-recognised startups can defer the TDS on the perquisite to the earliest of about 48 months from the end of the allotment year, the sale of the shares, or the employee leaving. A restricted stock unit (RSU), by contrast, is taxed on its full value at vesting.
| Feature | Detail |
| Governing Law | Section 62(1)(b), Companies Act 2013. |
| Approval | Special resolution of shareholders. |
| Key Filing | MGT-14, then PAS-3 on exercise. |
| Min. Vesting | One year from grant. |
| Valuation | Category I merchant banker (unlisted). |
| Tax Points | At exercise and at sale. |
What is an ESOP?
An Employee Stock Option Plan gives employees the option to buy the company’s shares at a fixed price after a vesting period, aligning their reward with the company’s growth.
How is an ESOP approved?
The shareholders must approve the ESOP scheme by a special resolution, and the company files MGT-14 within 30 days, before any options are granted.
What is the minimum vesting period?
There must be a minimum gap of one year between the grant of the options and the first vesting.
Can promoters get ESOPs?
As a rule, promoters and those holding 10% or more cannot be granted options, except in DPIIT-recognised startups for their first ten years.
How is an ESOP taxed?
It is taxed at exercise as a perquisite on the gain over the exercise price, and again at sale as a capital gain on any further increase in value.
Can startups defer the tax?
Yes. DPIIT-recognised startups can defer the TDS on the exercise perquisite to the earliest of about 48 months, the sale of the shares, or the employee leaving.
