Published Wed, 08 Apr 2026 | Updated Wed, 08 Apr 2026 Legal
In today Corporate Environment, Organization chooses different Strategies and compensation methods to reward, motivate and retain employee in the Organization, one such mechanism is Employee Stock Option it is a structure mechanism that rewards employee with the right to purchase the share of the Company at price below then the Market Value, helping given them a possibility to take part in the Future growth of the Organization.
The concept of Employee Stock Option Plan is based on the idea of aligning the interests of employees with those of shareholders. ESOP has become popular among start-up and growing enterprise, as its helps to reimburse employee without immediate Cash flow while encouraging a high performance culture.
Employee Stock Option means the option given to the directors, officers or employees of a company or of its holding Company or subsidiary company or companies, if any, which gives such directors, officers and employees the benefit or right to purchase or subscribe for the shares of the Company at a future date at a pre-determined price.
Employee Stock Option is generally governed under Section 62(1)(b) of the Companies Act, 2013, along with Companies (Share Capital and Debentures) Rules 2014, covering different aspects of the Employee Stock Option Plan.
For listed entities, ESOP is further regulated under the Securities and Exchange Board of India by SEBI (Share based Employee Benefit and Sweat Equity) Regulations,2021.
1. Employee Retention – Many employees try to stay longer to receive stock option
2. Performance Incentive – employee is motivated to increase the performance of the company which led to increase in the Share Value of company.
3. Ownership Culture – Employee feels like a Shareholder in the Company which increase loyalty and commitment
4. Alternative for Cash consideration – Start-up or growing companies with limited Cash flow can easily use it as a Reward Mechanism
1. Option - option given to an employee that gives such an employee the right to purchase or subscribe at a future date, the shares offered by the company, directly or indirectly, at a pre-determined price.
2. Vesting Period: The ESOP vesting period is the time frame between when employees get their ESOPs and when they are able to exercise any attached rights to options or shares. The employees are only able to obtain these shares once the ESOP vesting term has completed.
3. Exercise period: It means the time period which starts after the completion of vesting period within which an employee can exercise his/her right to apply for shares against the vested options in pursuance of the scheme of ESOP approved by the shareholders in general meeting by way of Special Resolution.
4. Exercise price: Means the price payable by an employee for exercising the options granted in pursuance of the scheme of ESOP
As per the provisions of the Companies Act, 2013 and rules made thereunder, below mentioned Employees eligible to take part in the Employee Stock Option Plan:
(a) A permanent employee of the Company who has been working in India or outside India; or
(b) A Director of the Company, whether a whole-time Director or not, but excluding an Independent Director; or
(c) An employee as defined under above (a) and (b) of a Subsidiary, in India or outside India, or of a holding company of the Company.
It does not include the following employee
(a) An employee who is a promoter or a person belonging to the promoter group;
(b) A director who either himself or through his relative or any Body corporate, directly or indirectly, holds more than 10% of the Outstanding Equity Share of the Company.
Further, these two conditions shall not apply for up to ten years from the date of its incorporation or registration.
The Company shall prepare an ESOP scheme which clearly defines the terms & conditions of the plan, such as vesting periods, exercise price and total number of options granted to the employee.
Once the scheme is prepared, the scheme should be approved by the Board of Director and thereafter by the shareholder of the Company by passing Special Resolution in the General Meeting.
The Company grant option to employee in accordance with the approved scheme. There shall be a minimum period of One year between the grant of option and vesting of option. Once vesting period completed, the employee can exercise its Option.
Upon exercise, the Board of Director of the Company passes a resolution for allotment of Shares. The Company shall be required to file Form PAS – 3 (Allotment of Shares) with Registrar of Companies
The Company shall maintain a Register of Employee Stock Option (Form SH-6) having information of the employee holding shares of the Company and Share certificate will be issued as well.
If a Company grants ESOPs to its foreign employees, it has to comply the Foreign Exchange & Management Act 1999. In the context of FEMA regulations, investment received from the foreign employee is treated as FDI.
Any investment made by the foreign employee shall be subject to the entry routes i.e Automatic or Approval route, Sectoral Cap, and investment limits.
In case of the approval route, approval from the RBI is mandatory before the grant of such ESOP to the foreign employees. But for the automatic route, no approval is required.
Note: If Indian holding company issues ESOP to employees of its foreign subsidiary, who are working in the land sharing border countries such as Pakistan, Bhutan, China, Taiwan, Nepal, Myanmar etc the approval from the government is mandatory subject to the FDI Rules for Land Border countries.
Foreign employees must remit the payment for their stock options through the authorized dealer as per foreign exchange regulations.
The price at which ESOPs are granted must adhere to the pricing regulations. In case of an unlisted Indian Company, the valuation of equity instruments is done as per any internationally accepted pricing methodology for valuation on an arm’s length basis, duly certified by a Chartered Accountant or a SEBI-registered Merchant Banker, or a practicing Cost Accountant.
The following are the reporting requirements under FEMA:
1. Form Employees' Stock Option ESOP –
An Indian company issuing employees' stock option (ESOP) to persons resident outside India shall file the Form ESOP within 30 days from the date of issue of employees' stock option with Reserve Bank of India through FIRMS Portal.
2. Form Foreign Currency-Gross Provisional Return (FC-GPR) –
An Indian company issuing equity instruments to an employee who is a person resident outside India shall report such issue in Form FC-GPR, not later than thirty days from the date of issue of equity instruments with the Reserve Bank of India through the FIRMS Portal.
Once the vesting period is completed, the employee can exercise his option and purchase shares at a pre-determined price, which is less than the share’s Fair Market Value, the difference between the Market Value and the exercise price of the shares is considered as a Perquisite Income in the employee's hands and taxed at his income tax slab rate.
If the employee sells the shares, the difference between the selling price and the fair market value (FMV on the date when option was exercised to acquire shares) is taxable as capital gains.
If the shares are held for a period of up to 24 months, then the capital gains are considered to be short-term capital gains and are subject to income tax as applicable to your income tax slab.
In case the shares are held for longer than 24 months, then such gains are considered long-term capital gains and are taxed at 12.5%. There is no indexation benefit from FY 2024-25 onwards.
Employers have to deduct TDS (Tax Deducted at Source) on the value of perquisite at the time of exercising ESOPs. Perquisites will be added as a taxable portion in the employee’s salary and will be subject to TDS as per the applicable Slab rate to such employee.
One of the most effective ways of motivation and retention is the Employee Stock Option Plan, which makes employees feel like they own a part of their employer’s business. They can also act as a powerful incentive for building value through the alignment of personal and organizational interests.
At CompaniesNext, we go beyond basic compliance to deliver ESOP solutions that are practical, scalable, and aligned with your company’s growth objectives.
ESOPs can be granted to permanent employees, officers and directors of company or holding and subsidiary company of such company. (Excluding independent directors). Promoters and promoter group members are generally not eligible.
2. Is there any minimum vesting period required for ESOP?
Yes, a minimum of 1 year is required between the grant of options and vesting of option.
Yes, ESOPs can be issued to non-resident employees or directors subject to compliance with FEMA regulations, sectoral caps, pricing guidelines, and RBI reporting requirements.
Yes, ESOP schemes must be approved by shareholders by passing a special resolution under Section 62(1)(b) of the Companies Act, 2013.
No, ESOPs are non-transferable as per the Companies Act,2013. However, once shares are allotted after exercise, they can be transferred to another person, subject to applicable laws.
Yes, valuation is mandatory specially when ESOP are issued to non-residents, valuation must comply with FEMA guidelines and be supported by a recognized valuer.
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