FreeComplianceESOPs for Indian startups: rules, process and tax
Employee stock options (ESOPs) let a startup reward employees with a share in its growth. A private company issues them under Section 62(1)(b) of the Companies Act and Rule 12 of the Share Capital Rules.
Setting up an ESOP plan
- 1.Draft the ESOP scheme: pool size, eligibility, vesting, exercise price and period.
- 2.Board approves the scheme.
- 3.Shareholders approve by special resolution, and MGT-14 is filed.
- 4.Grant options to employees with grant letters.
- 5.Maintain the register of options in SH-6.
- 6.Allot shares on exercise and file PAS-3.
Key rules
- Minimum vesting period of one year between grant and vesting.
- Options cannot be granted to promoters or to directors holding more than 10% (directly or indirectly), except that DPIIT-recognised startups may grant to them for 10 years from incorporation.
- Options are not transferable and lapse as per the scheme on leaving.
Tax
Employees are taxed in two stages: as a perquisite on exercise (fair market value minus exercise price), and as capital gains on sale. Employees of eligible DPIIT startups can defer the perquisite tax until the earliest of 48 months, sale or leaving.
Frequently asked questions
This guide is general information, not legal advice. Government fees and procedures change; confirm current figures before you file.
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