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ESOP Services

From ESOP pool design through scheme drafting, board and shareholder approvals, monthly grant administration, vesting tracking, and perquisite tax handling at exercise. Built for Indian startups and private companies under Companies Act 2013 and Income Tax Act 2025.

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The ESOP Lifecycle.

Four stages over the life of an ESOP: pool design and scheme drafting upfront, employee grants, vesting through the period, and exercise with the perquisite tax event. Each stage has Companies Act and tax law requirements.

Setup
Pool design & scheme drafting
ESOP pool size decided based on cap table dynamics and dilution targets. ESOP scheme drafted per Section 62(1)(b) Companies Act 2013 + Rule 12 Companies (Share Capital and Debentures) Rules. Board resolution, special resolution (75%), and MGT-14 filing prepared.
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Per grant
Employee grants & documentation
Eligible employees identified. Grant letters drafted with vesting schedule, exercise price (per FMV rules), cliff period, and exit conditions. Board approves each grant batch. Statutory grant register maintained. Form PAS-3 not required at grant stage, only at allotment.
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Vesting period
Vesting & cap table tracking
Vesting tracked grant-by-grant against the cliff and vesting schedule. Cap table updated each quarter with vested vs unvested split. Exits handled per scheme terms (typically forfeiture of unvested + window for vested). Dilution implications monitored.
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At exercise
Exercise, allotment & tax
Employee exercises vested options at exercise price. FMV determined (Cat I Merchant Banker for unlisted). Share allotment via board resolution, PAS-3 filed within 30 days. Perquisite tax computed and TDS deducted under Section 392 of IT Act 2025 (deferral for eligible startups).
↺ Lifecycle repeats per ESOP grant batch. A company typically runs one ESOP scheme but multiple grant batches over time. Each grant has its own vesting clock and exercise window.

What Is an ESOP?

An Employee Stock Option Plan (ESOP) is a structured arrangement under which an Indian company grants its employees the right (but not obligation) to acquire equity shares at a pre-determined exercise price after a vesting period. ESOPs serve two purposes: attract and retain talent by offering equity upside that cash compensation cannot match, and preserve cash at early stages by substituting non-cash compensation for salary. The framework spans three regulatory regimes: Companies Act 2013, Income Tax Act 2025 (which replaces the 1961 Act from 1 April 2026), and FEMA where foreign employees are involved.

ESOP services cover three pillars. Structuring: pool sizing, scheme drafting, board and shareholder approvals (special resolution under Section 62(1)(b) Companies Act 2013, MGT-14 filing). Administration: grant documentation, vesting tracking, cap table updates, employee communication, exit handling. Tax: FMV valuation at exercise, perquisite tax computation under Section 17(1)(d) of IT Act 2025 (successor to Section 17(2)(vi) of 1961 Act), TDS under Section 392, and capital gains treatment at sale.

The two-stage ESOP tax framework

Stage 1: Perquisite at exercise. (FMV on exercise date, exercise price) × number of shares is treated as a perquisite, taxed as salary at slab rates, with TDS deducted by the employer. Stage 2: Capital gains at sale. (Sale price, FMV at exercise) is the capital gain, with the FMV at exercise (not the exercise price) being the cost of acquisition. Listed shares: LTCG at 12.5% beyond 12 months (with ₹1.25 lakh exemption), STCG at 20% (post Budget 2024). Unlisted shares: LTCG at 12.5% beyond 24 months (no indexation), STCG at slab rates.

The DPIIT startup deferral

For employees of eligible startups (DPIIT recognition plus IMB Certificate under Section 140 of IT Act 2025, successor to Section 80-IAC), perquisite tax can be deferred under Section 392(3) read with Section 289(3) to the earliest of: 60 months from end of tax year of allotment (for shares allotted on or after 1 April 2026; was 48 months under the 1961 Act for earlier allotments), date of sale, or date of cessation of employment. The deferral is a timing benefit, not a reduction. Only ~3,700 of 1.97 lakh+ DPIIT-recognised startups currently have IMB certification, so most startups' employees do not get the deferral.

What Gets Done Each Cycle.

Six activities across the ESOP lifecycle. From pool design through exercise, every step end-to-end, covering Companies Act, tax, and administration.

Pool sizing & cap table planning
One-time
Pool size benchmarked against stage and sector (typically 10-15% pre-Seed, expanding to 15-20% pre-Series A). Dilution modelled across future rounds. Founder vesting separate from employee ESOPs. Cap table cleanly updated.
Scheme drafting & approvals
One-time
ESOP scheme drafted per Section 62(1)(b) Companies Act + Rule 12 Companies (Share Capital and Debentures) Rules. Board resolution, special resolution at AGM / EGM (75%), MGT-14 filed within 30 days. Scheme document referenced in every grant letter.
Grant administration
Per grant
Grant letters drafted with vesting schedule (typically 4 years with 1-year cliff), exercise price (per FMV norms), exit treatment. Board approval per grant batch. Grants logged in statutory register. Employee communication and tax explainer.
Vesting & exit tracking
Quarterly
Vesting tracked grant-by-grant against cliff and schedule. Cap table updated quarterly with vested / unvested split. Employee exits handled: unvested forfeited; vested have exercise window per scheme. Buyback or cashless exit considered for liquidity events.
Exercise & allotment
Per exercise
FMV determined on exercise date (Cat I Merchant Banker for unlisted). Share allotment via board resolution. PAS-3 filed with ROC within 30 days. FC-GPR filed within 30 days for foreign employees. Share certificates issued within 60 days.
Perquisite tax & TDS
Per exercise
Perquisite computed: (FMV on exercise, exercise price) × shares. Taxed as salary, TDS deducted under Section 392 of IT Act 2025. For eligible DPIIT + IMB startups, deferral to earliest of 60 months / sale / exit. Form 130 (formerly Form 16) reflects the perquisite.

When You Need Us to Handle This.

ESOPs touch Companies Act, Income Tax Act 2025, and FEMA simultaneously. Here's when professional handling protects the cap table, the tax position, and the employees, and when DIY is workable.

Get help if
  • You're creating your first ESOP scheme. Pool sizing, scheme drafting, and shareholder approvals need to be done right the first time. Retrofitting an ESOP scheme after grants are out is far harder than getting it right at the start.
  • Your existing scheme references Section 17(2)(vi) or other IT Act 1961 sections. Old ESOP scheme documents, grant letters, employment agreements, and board resolutions with 1961 Act section numbers need to be audited and updated before the next exercise event after 1 April 2026.
  • Employees are exercising soon and need tax clarity. Perquisite tax at exercise is the most cash-flow-painful tax event for employees, taxed on notional gains with no liquidity. Pre-exercise tax modelling helps employees decide when to exercise.
  • You're DPIIT-recognised and pursuing IMB Certification under Section 140. Section 140 IMB certification unlocks the 60-month deferral for employees, a major recruitment and retention advantage. Only ~3,700 startups have it; the application process needs careful handling.
  • You're granting ESOPs to foreign employees or non-resident directors. FEMA Form ESOP via FIRMS, valuation per FEMA pricing norms (separate from tax FMV), and TDS treatment for non-residents all need coordination. The risk is rejection of allotment if filings are missed.
Skip if
  • You're a sole proprietorship or partnership firm. ESOPs are issued by companies (or LLPs to a limited extent). Sole proprietorships and traditional partnerships cannot issue stock options, profit-sharing arrangements are the alternative.
  • You have an in-house CS / legal + finance team experienced with ESOPs. Companies with established ESOP infrastructure (vesting tools, board calendar, valuation relationships) can self-manage. Professional handling returns for major events: new schemes, IMB certification, exits, buybacks.
  • You're considering an alternative to ESOPs. Phantom stock plans, stock appreciation rights (SARs), and sweat equity (Section 54 Companies Act) are alternatives that may suit certain scenarios. We help evaluate before assuming ESOPs are right.
  • You're a listed company. Listed company ESOPs follow SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021 with additional disclosure, trustee, and trust requirements. Specialist listed-co ESOP advisors typically handle these.

How We Work.

Six commitments. One dedicated CA across scheme drafting, grant administration, exercise events, and employee tax for every ESOP cycle.

Dedicated CA on your account
Not a ticket queue. The same chartered accountant handles your filings every month. Personal accountability, not a hand-off chain.
WhatsApp & email access
Business-hours response. Urgent issues escalated within 2 hours. No more chasing emails into a void.
Scheme & approvals in 4 weeks
Pool sizing, scheme drafting, board resolution, special resolution (EGM if needed), and MGT-14 filing completed within 4 weeks of engagement. Grants ready to issue right after.
Document upload via portal or Drive
Pick your tool. We adapt to your workflow, not the other way around. CSV, Tally exports, Excel, all supported.
Exercise tax model within 48 hrs
For any planned employee exercise, perquisite computation, TDS impact, and post-tax cash-flow modelling delivered within 48 hours of request. Helps employees decide timing.
ESOP & cap table dashboard
Live cap table with pool, granted, vested, unvested, exercised, and available-for-grant tracked per grantee. Updated quarterly or after every grant / exercise event.

ESOP Tax Events at a Glance.

Two tax events, two valuation moments, two cash-flow shocks. Reference table for every stage from grant to sale, under IT Act 2025 from 1 April 2026.

Event
Tax stage
What gets taxed
Rate / treatment
Grant of options
Nil
No tax event
N/A
Vesting
Nil
No tax event
N/A
Exercise (general)
Stage 1 perquisite
(FMV, exercise price) × shares
Slab + TDS under Sec 392
Exercise (DPIIT + IMB startup)
Stage 1 deferred
Same perquisite computation
Deferred to earliest of 60mo / sale / exit
Sale, listed shares, >12 months
Stage 2 LTCG
(Sale price, FMV at exercise)
12.5% above ₹1.25 lakh exempt
Sale, listed shares, ≤12 months
Stage 2 STCG
(Sale price, FMV at exercise)
20% (post Budget 2024)
Sale, unlisted shares, >24 months
Stage 2 LTCG
(Sale price, FMV at exercise)
12.5% no indexation
Sale, unlisted shares, ≤24 months
Stage 2 STCG
(Sale price, FMV at exercise)
At slab rates
Cessation of employment (deferred case)
Stage 1 due
Original perquisite
TDS within 14 days of exit
FMV at exercise = cost of acquisition for capital gains, not exercise price. Critical to retain valuation reports at exercise for capital gains computation later. IT Act 2025 sections apply for shares allotted on or after 1 April 2026; earlier allotments under IT Act 1961.

Frequently Asked Questions.

Conventional benchmarks for Indian startups: 10-15% pre-Seed, expanding to 15-20% pre-Series A, and topped up at each major round. The right size depends on hiring plan over the next 18-24 months and dilution tolerance. Pool created from authorized capital not yet issued (so does not affect founders' shareholding directly until grants vest and are exercised). We model pool size against dilution at next 3 rounds before recommending.
Under the Companies Act 2013: Section 62(1)(b) read with Rule 12 of Companies (Share Capital and Debentures) Rules 2014. Steps: (1) board resolution approving the scheme; (2) special resolution at AGM / EGM with 75% shareholder approval; (3) MGT-14 filed with ROC within 30 days; (4) ESOP scheme document executed; (5) grant letters issued to eligible employees. Listed companies follow SEBI (Share Based Employee Benefits and Sweat Equity) Regulations 2021 instead.
Two-stage tax, same substantive structure as before, with renumbered sections. Stage 1, Perquisite at exercise: (FMV on exercise date, exercise price) × shares taxed as salary at slab rates, with TDS deducted by the employer under Section 392 of IT Act 2025 (successor to Section 192 of 1961 Act). The perquisite section is now Section 17(1)(d) of IT Act 2025 (successor to Section 17(2)(vi) of 1961 Act). Stage 2, Capital gains at sale: (Sale price, FMV at exercise). The IT Act 2025 applies for shares allotted on or after 1 April 2026.
DPIIT recognition is the broader status given by the Department for Promotion of Industry and Internal Trade to any Indian startup meeting age, turnover, and innovation criteria. ~1.97 lakh+ startups have DPIIT recognition as of April 2026. IMB Certification under Section 140 (successor to Section 80-IAC) is a much narrower status granted by the Inter-Ministerial Board, only ~3,700 have it. Only IMB-certified startups' employees get the ESOP tax deferral. DPIIT alone does NOT unlock the deferral, a common misunderstanding.
For employees of startups with both DPIIT recognition + IMB Certification under Section 140, the perquisite tax at exercise is deferred under Section 392(3) read with Section 289(3). The tax becomes payable at the earliest of: (1) 60 months from end of tax year of allotment (for shares allotted on or after 1 April 2026; was 48 months under the 1961 Act for earlier allotments); (2) date of sale of the shares; (3) date of cessation of employment with the issuing company. It is a timing benefit, not a tax reduction.
Listed shares: closing price on the recognised stock exchange on the exercise date (or average of highest and lowest where applicable). Unlisted shares: valuation by a SEBI-registered Category I Merchant Banker under Rule 3(8) of Income Tax Rules. The valuation should be done as close to the exercise date as practical; reports older than 90 days from exercise may be challenged. The FMV is the pivot point: it caps the perquisite (Stage 1) and floors the capital gain (Stage 2).
The FMV at exercise is the cost of acquisition, not the exercise price. This is the most common ESOP tax mistake. Because the difference (FMV minus exercise price) has already been taxed as a perquisite under Stage 1, treating only the exercise price as cost would amount to double taxation. The IT Act explicitly provides that the FMV at exercise becomes cost of acquisition for the Stage 2 capital gains calculation. Critical to retain valuation reports for capital gains computation later.
Post Budget 2024 (effective from 23 July 2024 transfers): Listed shares: LTCG at 12.5% above ₹1.25 lakh exemption for holding period > 12 months; STCG at 20% for ≤ 12 months. Unlisted shares: LTCG at 12.5% for holding period > 24 months (no indexation benefit); STCG at slab rates for ≤ 24 months. The holding period starts from the date of allotment (post-exercise), not from grant or vesting.
Standard ESOP scheme treatment: unvested options are forfeited immediately on exit. Vested but unexercised options typically have an exercise window of 90 days to 6 months post-exit (per scheme terms). If the employee exercises during this window, normal Stage 1 perquisite tax applies. If the employee was under the DPIIT deferral and exercised before exit, the deferred tax becomes due within 14 days of exit regardless of share liquidity. Pre-exit tax planning matters for deferred employees.
Substantively no, the rules are largely unchanged. Procedurally yes, every ESOP scheme document, grant letter, employment agreement, and board resolution that cites old IT Act 1961 section numbers (17(2)(vi), 80-IAC, 192(1C)) carries an invalid reference for income earned from 1 April 2026 onwards. Pre-1-April-2026 allotments continue under 1961 Act references; post-1-April-2026 allotments need 2025 Act section references. We audit all ESOP documents before the next exercise event and update where needed.
Yes, with additional FEMA layer. Allotment of shares under ESOP to a non-resident is reportable on Form ESOP via FIRMS portal within 30 days of allotment. Valuation must comply with both FEMA pricing norms (not below fair value) and Income Tax FMV rules, which can diverge and need to be reconciled. TDS deduction depends on the employee's residency status. We coordinate Companies Act + FEMA + Income Tax across the three regimes.
Pricing depends on what's in scope: scheme drafting + approvals (one-time setup), grant administration (per grant), exercise + tax handling (per exercise event), and IMB Certification application if applicable. Most clients start with a scheme + first grant batch as a project, then engage on a per-event basis for subsequent grants and exercises. Reach out for an exact quote based on your specific ESOP plan and stage.

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