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Employee Stock Option Plan (ESOP): Meaning, Benefits, and Tax Rules in India

Employee Stock Option Plan (ESOP): Meaning, Benefits, and Tax Rules in India

An Employee Stock Option Plan (ESOP) is a way for companies to reward and retain employees by giving them the right to buy company shares at a pre-decided price in the future. ESOPs are common in startups, tech firms, and listed companies, helping employees share in the company’s growth and success.

In this guide by IndiaLends, we explain what ESOPs are, how they work, their benefits, taxation rules, and important things to know before you accept them.

What is an Employee Stock Option Plan (ESOP)?

An ESOP is an employee benefit scheme where a company grants employees the option to purchase its shares at a fixed price (known as the grant price) after completing a certain period, known as the vesting period.

How Does an ESOP Work?

Step	Process	Details
1	Grant	Company offers ESOPs to eligible employees.
2	Vesting Period	Employee must work for a fixed time before they can exercise the option.
3	Exercise	Employee chooses to buy the shares at the pre-fixed exercise price.
4	Sale	Employee can sell shares in the market (if listed) or to the company (if unlisted).

Example of ESOP Working

Grant Price: ₹100 per share

Market Price after Vesting: ₹300 per share

If you exercise your ESOP, you buy at ₹100 and can sell at ₹300, making a profit of ₹200 per share (subject to taxes).

Benefits of ESOPs

Wealth Creation: Opportunity to benefit from the company’s future growth.

Retention Tool: Encourages employees to stay longer in the company.

Sense of Ownership: Employees feel more connected to the company’s success.

No Immediate Cash Outflow: You pay only when exercising the options.

Taxation of ESOPs in India

ESOPs are taxed at two stages:

Stage	Tax Type	Taxed On	Rate
At Exercise	Perquisite Tax (as salary)	Market Price – Exercise Price	As per income tax slab
At Sale	Capital Gains Tax	Sale Price – Market Price at Exercise	15% (STCG) or 10% (LTCG) depending on holding period

For detailed tax rules, you can refer to the Income Tax Department ESOP guidelines.

Important Things to Check Before Accepting ESOPs

Vesting schedule and conditions

Exercise price vs. current market value

Lock-in periods for sale

Exit options if the company is unlisted

Tax liabilities at exercise and sale

IndiaLends Tip

If you’re planning to exercise your ESOPs but don’t have immediate funds, you can explore a personal loan from IndiaLends with quick approval and flexible repayment.

Apply Now with IndiaLends

Frequently Asked Questions (FAQs)

Q1. Are ESOPs free for employees?
No, employees must pay the exercise price to convert ESOPs into shares.

Q2. What happens to my ESOPs if I leave the company?
Unvested ESOPs usually lapse, while vested ones can be exercised within a certain time frame.

Q3. Are ESOP gains taxable in India?
Yes, ESOPs are taxed as perquisite at exercise and as capital gains on sale.

Q4. Can ESOPs be part of CTC?
Yes, many companies include ESOP value in the total CTC package.

Q5. Do ESOPs work the same in startups and listed companies?
The concept is similar, but liquidity and exit options differ.