ESOPs for growing companies in India can support retention, hiring and long-term employee ownership well before an IPO. Founders sometimes view them only as a listing requirement, while CFOs may first encounter them as an audit expense. Both views miss the main use. For a growing private company, an ESOP scheme is a way to decide, in advance and in writing, who shares in the growth of the company, on what terms, and at what cost to the existing owners. This guide is written for CFOs, promoters, tax heads, founders and co-founders, and it covers the decision in the order each of them will need it.
The guide does not repeat the design of a full scheme document or the mechanics of a listed company plan. For the design and documentation work, see our ESOP consultant services in India. For the fair market value of unlisted shares that supports the issue, see share Valuation in India.
Key takeaways
- An ESOP scheme does not need an IPO. A private company can grant options under Section 62(1)(b) of the Companies Act, 2013, after a special resolution and a scheme that meets the Share Capital and Debentures Rules, 2014.
- Options are a retention tool that turns the employee’s reward into the company’s growth. They also let a cash-constrained company pay senior people a package it could not fund in salary.
- Promoters and the promoter group cannot be granted ESOPs in a private company, and directors holding more than 10 per cent of the equity are also excluded, subject to the start-up exemption. Design the scheme for the people who are actually eligible.
- Ind AS 102 requires the fair value of options at grant to be charged to profit over the vesting period, so the expense shows in the accounts even when no cash is paid out.
- On exercise, the difference between the fair market value and the exercise price is taxed as a perquisite in the employee’s salary income. The fair market value of unlisted shares must be determined, which is why a Valuation is needed before the first exercise.
- The city does not change the ESOP law, because the Companies Act, the Income-tax Act and the FEMA rules apply across India. What changes between Pune, Mumbai, Ahmedabad, Bengaluru, Delhi and Gurugram is the hiring market, which should shape the pool and the vesting design.
What Is an ESOP Scheme and How Does It Work in a Private Company in India?
An employee stock option plan, or ESOP, is a scheme under which the company grants options to eligible employees. Each option gives the right, but not the obligation, to buy one share at a stated exercise price after the vesting conditions are met. The scheme sets the exercise price or its formula; the employee’s benefit depends on the share value when exercised relative to that price. This guide follows five stages: approval, grant, vesting, exercise and sale. Approval establishes the scheme; grant and vesting establish the option rights; exercise leads to share allotment; and a later sale creates a separate tax event.
In a private limited company, the legal basis is Section 62(1)(b) of the Companies Act, 2013, which allows further shares to be issued to employees under a scheme approved by a special resolution. The Share Capital and Debentures Rules, 2014 add the detail for the scheme, the register and the reporting. Listed companies follow a separate regime, and that regime is not the subject of this guide.
The five stages of an ESOP
| Stage | What happens | Who must act, and what must be in writing |
|---|---|---|
| Approval | The shareholders approve the scheme and the pool by a special resolution | Board and shareholders. The explanatory statement must disclose the total options, the eligible employees, the vesting terms and the exercise price method |
| Grant | Options are granted to named employees at a stated exercise price; shares are allotted only after exercise | Board resolution and a grant letter. The Register of Employee Stock Options in Form SH.6 is updated |
| Vesting | The employee earns the right to exercise over time | The minimum vesting period is one year between grant and vesting, under the rules as read in commentary |
| Exercise | The employee pays the exercise price and receives shares | The fair market value on exercise is determined, and the perquisite is taxed. Shares are allotted and filed |
| Sale | The employee sells the shares through an available, permitted liquidity route | Capital gains use the sale consideration and the exercise-stage tax cost basis, subject to applicable valuation and holding-period rules |
ESOP Advisory Services: What Elite Valuation Delivers
Elite Valuation is an independent Valuation firm founded in 2020 by Sagar Shah, a Chartered Accountant, Company Secretary and IBBI Registered Valuer, who holds an All India Rank in the CA examination. Before founding the firm he spent 9 years at Ernst & Young, working on cross-border structuring and transfer pricing. The firm provides ESOP advisory and ESOP Valuation services across India, alongside business Valuation, purchase price allocation, M&A advisory, FEMA, SEBI and Income Tax Valuations, financial modelling and tax-purpose share valuation reports.
An ESOP advisory engagement covers the scheme, the pool, the accounts and the tax on exercise together. Elite Valuation prepares these on one set of assumptions, so that the scheme, the grant letters, the Ind AS 102 expense and the exercise-date figures describe the same company. The table below sets out each service, what the company receives, and the section of this guide that explains it.
Scheme design and accounting deliverables
| Business need | Elite Valuation’s deliverables | Relevant section |
|---|---|---|
| ESOP scheme structuring | Choice of instrument, vesting, lapse and leaver terms, and the treatment on sale, drafted for the scheme document | Design section |
| Pool and dilution model | Pool sizing against the hiring plan, the grant schedule and the dilution across the planned rounds | Pool sizing section |
| Grant-date fair value of options | Option fair value on the grant date, with the inputs documented for the auditor | Ind AS 102 section |
| Ind AS 102 expense schedule | Expense by year over the vesting period, with the forfeiture assumption | Ind AS 102 section |
| Exercise-date fair market value | Perquisite-valuation support, coordinated with the Category I merchant banker required for unlisted equity under Rule 15(6) | Tax section |
| Eligibility and approval review | Review of the eligibility of each grantee and the approval steps, coordinated with the company’s counsel | Legal steps section |
For the full scope of the ESOP practice, see ESOP consultant services in India. For the fair market value of unlisted shares, see Share Valuation in India.
Why companies bring ESOP work to Elite Valuation
- Credentials in three disciplines. The founder is a Chartered Accountant, a Company Secretary and an IBBI Registered Valuer, and holds an All India Rank in the CA examination.
- Cross-border depth. 9 years at Ernst & Young on cross-border structuring helps with ESOPs for employees and holding structures outside India.
- Practice in the rules that drive the number. Ind AS 102, the employee-perquisite valuation requirements for unlisted shares and the FEMA NDI Rules form part of the firm’s regular work.
- One set of numbers. The pool model, the grant-date fair value, the expense schedule and the exercise-date figures are kept consistent, so that the auditor and the tax team find one story.
Start an ESOP Advisory Scope With Elite Valuation
Share the cap table, the proposed pool, the list of the people to be covered, the grant dates and the latest accounts. Elite Valuation confirms the purpose, the fair value basis, the reports needed for the first grant and the tax steps for each exercise, and sends a written fee after that call.
Book an ESOP Scope CallESOP Advisory | ESOP Valuation | Option Fair Value | Ind AS 102 Expense | Employee Perquisite Valuation | Perquisite and TDS Support
Legal Approvals and Eligibility Before Granting ESOPs
A private company can grant ESOPs, but only in the order the law sets out. The approval comes first, then the eligibility of each employee, then the grant, and then the register and the disclosures. A grant made before the special resolution, or to an excluded person, is defective, and the defect is hard to cure once shares have been allotted. The table below sets out the points that matter most for a private company, with the source for each.
Approvals and grantee eligibility
| Requirement | What the company must do | Basis |
|---|---|---|
| Special resolution | Approve the scheme and the pool by special resolution. The explanatory statement must disclose the total options, the eligible employee classes, the vesting terms, the exercise price method and the lapse conditions | Section 62(1)(b), Companies Act, 2013, as read in commentary |
| Eligible employees | Permanent employees, directors (including whole-time directors, but not independent directors), and employees of subsidiary or holding companies | Share Capital and Debentures Rules, 2014, as read in commentary |
| Excluded persons | Promoters and the promoter group, and directors who hold more than 10 per cent of the outstanding equity directly or through relatives or bodies corporate. The start-up exemption lifts these exclusions for ten years from incorporation or registration | Share Capital and Debentures Rules, 2014, as read in commentary |
| Identified employees | A separate shareholder resolution is needed where options granted in one year equal or exceed 1 per cent of the issued capital for an identified employee, or for an employee of a subsidiary or holding company | As read in commentary. Confirm the threshold against the current rule before each grant |
| Vesting | A minimum of one year between grant and vesting. Options vest on death and on permanent incapacity while in employment | As read in commentary |
Vesting, records and cross-border requirements
| Requirement | What the company must do | Basis |
|---|---|---|
| Transferability | Options cannot be transferred, pledged or encumbered. Only the grantee may exercise, subject to the death provision | As read in commentary |
| Register and reporting | Keep the Register of Employee Stock Options in Form SH.6 and disclose options granted, vested, exercised and lapsed in the Directors’ Report | As read in commentary |
| Allotment on exercise | File the return of allotment for each exercise, with the exercise price and the consideration received | Companies (Prospectus and Allotment of Securities) Rules, 2014. Confirm the form and timing |
| Foreign employees | Options granted to non-resident employees must meet the FEMA position for that employee and the reporting required for the issue | FEMA NDI Rules, 2019. Confirm the current condition before each grant |
The scheme document decides what the company can do later
The scheme sets the lapse rules, the exercise period, the leaver categories, the treatment on sale, and whether unexercised terms may be varied. Commentary we reviewed states that unexercised terms may be varied by special resolution only if the change is not prejudicial to the option holders. A scheme drafted in haste will be hard to change when the company raises its next round or prepares for a sale.
Choosing an ESOP Design for Your Ownership Structure
The design of the scheme depends on who owns the company and who the company needs to keep. A founder-led company with a small co-founder team has different needs from a promoter-owned business that wants to reward managers without giving up control. A company with scarce technical hires has a different vesting profile from one with a long sales cycle. The choice is between the instruments, and then between the terms within each instrument.
Matching the scheme to ownership and funding needs
| Instrument | How the employee benefits | Best fit | Points to check before use |
|---|---|---|---|
| Stock options (ESOP) | Buys shares at a fixed exercise price after vesting, and gains the difference in value | Most private companies that want to reward growth with shares | Special resolution, eligibility, vesting, Valuation on exercise, and the perquisite |
| Restricted share units (RSU) | Receives shares, or their value, at vesting, without paying an exercise price | Companies that want a simpler reward, or a pool that gives value without a purchase | Legal structure under the Companies Act and the tax treatment on vesting must be checked before use |
| Stock appreciation rights (SAR) | Receives the rise in value of the shares, paid in cash or shares, without buying shares | Cash-settled SARs suit employees who should share growth without becoming shareholders; share-settled SARs can create shareholders | A cash liability may arise, and the accounting and funding must be planned |
| Phantom or cash-settled plan | Receives a cash amount linked to the company’s value on a trigger event | Key people who should be rewarded without any dilution | The cash payment must be funded and recognised as a liability |
How should a promoter-owned company allocate its employee pool?
Except where the qualifying-startup exemption applies, a promoter-owned company cannot use the scheme for promoters or the promoter group. The design therefore has to answer a different question: which non-promoter managers should share in the value, and how is the value they receive protected from later changes in the promoters’ control. Options for these companies include a pool reserved for named managers, a vesting schedule linked to a period of service, and a cash-settled element for managers who should not hold shares. The cap-table effect depends on whether shares are issued; a cash-settled plan instead creates a funding and accounting obligation.
ESOP Pool Sizing and Three-Year Dilution Planning
The pool is a commercial decision, not a legal limit, in the sources we reviewed. The scheme must state the total options and the maximum for each employee, but it does not set a single percentage. Market practice varies, and the pool should be sized from the hires the company plans to make, the value it wants to give each one, and the dilution the existing owners will accept. A pool that is too small leaves no room for the next hire. A pool that is too large dilutes the owners for a benefit they cannot see.
The base-case illustration below assumes a fixed fully diluted share base, a 10 per cent option pool and no financing or pool top-up during the three-year grant schedule. Each annual grant and balance is measured against that same base. A separate financing sensitivity follows; it is not included in the base-case percentages.
Three-year grant schedule on a fixed share base
| Item (hypothetical, fully diluted basis) | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Options granted as a share of fully diluted capital | 4.0% | 3.0% | 3.0% |
| Cumulative pool granted | 4.0% | 7.0% | 10.0% |
| Unallocated pool remaining | 6.0% | 3.0% | 0.0% |
Separate financing sensitivity: a 10% new-investor stake
There is no financing in Year 1. In this separate scenario, a new investor acquires 10 per cent of the post-money fully diluted capital at the end of Year 2. With no top-up, the original 10 per cent pool becomes 9 per cent of the enlarged base: 10% × 90% = 9%. It stays at 9 per cent in Year 3 if there is no further financing or top-up. These post-financing percentages must not be combined with the fixed-base grant schedule above.
The separate financing sensitivity shows why the percentage denominator must be stated explicitly. A new round dilutes the pool like any other holding, so the company must decide whether to top up the pool in the same round, and where the top-up sits. The decision changes the effective pre-money for existing holders, which is why the top-up should be modelled before the term sheet is discussed with investors.
A pool model every CFO should build before the first grant
- The hires planned for the next two years, by role, with the value each role should receive.
- The pool as a share of fully diluted capital, the grant schedule and the unallocated balance at each year end.
- The Ind AS 102 expense by year, with the forfeiture assumption and the grant-date fair value.
- The dilution after each planned round, with the pool top-up shown separately.
Scheme Costs and Accounting Under Ind AS 102
An equity-settled ESOP normally has no employee cash payout at grant, but setup, valuation, legal and administration fees may arise. It is not a cost-free arrangement. Ind AS 102, Share-based Payment, requires an equity-settled award to be measured at its fair value on the grant date, and that fair value is charged to profit or loss over the vesting period. The charge sits in employee benefit expense, reduces reported profit, and increases equity by the same amount through a share-based payment reserve. When the options are exercised, the reserve moves into share capital and share premium. No cash leaves the business for the option cost itself.
For companies that prepare accounts under Ind AS, the requirement is in Ind AS 102 directly. Companies that do not apply Ind AS follow the ICAI guidance on employee share-based payments. The framework that applies must be confirmed for each set of accounts, because the disclosure and the measurement rules differ.
How is the ESOP expense calculated? An illustration with hypothetical figures
The figures below are hypothetical. They show the mechanics and do not describe any company. The company grants 1,00,000 options with a fair value of ₹120 per option on the grant date, and the options vest together after four years as a single tranche, with no expected forfeitures. This simplified illustration assumes a four-year service period; graded vesting requires a separate tranche-by-tranche calculation.
Illustrative option cost and annual expense
| Item (hypothetical) | Amount |
|---|---|
| Options granted | 1,00,000 |
| Fair value per option on grant date | ₹120 |
| Total fair value of the grant | ₹1.20 crore |
| Annual expense over the four-year service period (single-tranche illustration) | ₹30 lakh |
| Expense in the first and each later vesting year | ₹30 lakh, until the grant is fully vested |
Where service or non-market vesting conditions are not met, the accounting estimate and cumulative expense are adjusted under the applicable accounting framework. Cancellation, modification and market conditions require separate analysis. The accounts therefore need a forfeiture assumption, and the valuer should document how it was estimated.
The fair value needs a model, and the model needs inputs that can be defended
For an unlisted company, the fair value of an option is estimated using an option pricing model. The inputs are the fair value of the underlying share on the grant date, the exercise price, the expected life, the volatility, the dividend assumption and the risk-free rate. Each input must be supported. An auditor who finds an unexplained volatility figure will ask for the basis, and the expense can change materially when it is revised.
How Is an ESOP Taxed for the Employee, the Company and the Promoters?
ESOP taxation in India has two stages, and most errors come from treating them as one. The first stage is the perquisite on exercise, which is taxed as salary. The second stage is the capital gain on the later sale of the shares. Each stage has its own Valuation, its own timing and its own return line.
For employee perquisites, Section 17(1)(d), read with Section 17(4)(h), of the Income-tax Act, 2025 applies. Equity-share valuation follows Rule 15(6) of the Income-tax Rules, 2026. For unlisted equity, a SEBI-registered Category I merchant banker determines the value on the permitted specified date; the report need not always be dated on the exercise date. The employer applies salary TDS under Section 392.
Employee tax at exercise and sale
| Stage | What is taxed | Valuation needed | Timing and reporting |
|---|---|---|---|
| Exercise (salary head) | Fair market value on exercise, less the exercise price paid | Fair market value of unlisted shares on the exercise date, under the prescribed rules | Tax deducted by the employer as salary. Reported in the employee’s return and in the employer’s TDS return |
| Sale (capital gains) | Sale price, less the cost, which is the fair market value taken as the perquisite value | Retain the exercise-date cost basis and check whether a separate transfer-value test applies to an unlisted-share sale | Unlisted equity shares generally qualify as long-term capital assets when held for more than 24 months. For ESOP shares, the holding period is reckoned from allotment or transfer to the employee, not the option grant date (Section 2(101), Income-tax Act, 2025). |
| Startup deferral | Eligible-startup tax deferral is governed by Section 392(3), read with Section 289(3), of the Income-tax Act, 2025 | Same Valuation as the exercise perquisite | Eligibility, the deferral period and the position under the Income-tax Act, 2025 must be confirmed before employees are told |
How much perquisite does an exercise create? An illustration with hypothetical figures
The figures below are hypothetical. An employee exercises 1,00,000 options with an exercise price of ₹20 per share, when the fair market value of the share on the exercise date is ₹120.
Illustrative perquisite and capital gain amounts
| Item (hypothetical) | Per share | For 1,00,000 shares |
|---|---|---|
| Fair market value on exercise | ₹120 | ₹1.20 crore |
| Exercise price paid by the employee | ₹20 | ₹20 lakh |
| Perquisite taxed as salary | ₹100 | ₹1.00 crore |
| Cost of acquisition for capital gains | ₹120 | ₹1.20 crore |
| Sale at ₹200 per share, gain on sale | ₹80 | ₹80 lakh |
The illustration shows why the Valuation on the exercise date matters twice. A low exercise-date value reduces the perquisite, but it also reduces the cost base, so the capital gain is larger on the same sale. The company that values its shares carelessly moves tax from one year to the next, and the employee bears the risk of a dispute on both.
What the tax head should check on every exercise
- The fair market value on the exercise date, the valuer’s category and the report date, kept on file before the shares are allotted.
- The exercise price paid, the number of options exercised and the TDS computed on the perquisite.
- Whether the employee is eligible for the startup deferral, and the trigger events that end the deferral.
- The allotment date, because the holding period for capital gains runs from allotment, not from grant.
What does the scheme mean for promoters and the company’s own tax position?
Unless the qualifying-startup exemption applies, promoters and the promoter group cannot be granted options under a private company scheme, as set out in the Share Capital and Debentures Rules, 2014 as read in commentary. A promoter-owned company therefore uses the scheme for the non-promoter team, and the promoters’ shareholding is diluted when shares are issued to employees. Dilution itself is not a taxable event for the promoters, but the sale of their own shares, the Valuation of the company for other purposes, and any later share transfer have their own tax consequences that should be modelled first.
The company’s own tax deduction for the cost of an ESOP is not the same as the accounting expense under Ind AS 102. The accounting charge reduces reported profit, but the deductibility of the employer’s cost must be confirmed with the tax adviser for each scheme. A tax head who assumes that the accounting expense is deductible will find the difference in the return.
Need the Exercise-Date Valuation and the Ind AS 102 Expense Computed?
Elite Valuation prepares option fair value and the accounting schedule, and coordinates the required merchant-banker valuation for unlisted-equity perquisites. Send the scheme, the grant dates, the vesting terms and the latest accounts to start the computation.
Request the ESOP ComputationInd AS 102 Expense | Option Fair Value | Exercise-Date Valuation | Perquisite and TDS Support
How Does Elite Valuation Structure ESOPs for Companies in Pune, Mumbai, Ahmedabad, Bengaluru, Delhi and Gurugram?
The city does not change the ESOP law. The Companies Act, 2013, the Share Capital and Debentures Rules, 2014, the Income-tax Act and the FEMA rules apply across India, so the same special resolution, the same vesting rule and the same perquisite rule apply to a company in Pune as to one in Gurugram. What changes from one city to another is the hiring market, the salary benchmark for each role and the local office where the company files. Those differences affect the size and the design of the pool more than the legal steps do. Elite Valuation applies the same scheme design, the same Ind AS 102 expense schedule and the same exercise-date Valuation to a company in each of these cities, and benchmarks the pool against the offers that company faces in its own hiring market.
ESOP planning across six hiring markets
| City | Hiring market to benchmark against | Local point to check before a grant |
|---|---|---|
| Pune | Engineering, manufacturing and product roles, often benchmarked against local offers and against the nearby metros | The state of the registered office, and the Registrar of Companies where the company files its returns |
| Mumbai | Financial services, media and senior management roles, often benchmarked against national and global peers | The Registrar where the company files, and the bank process for any non-resident holder |
| Ahmedabad | Manufacturing, trading and services roles, often benchmarked against local salary surveys and relocated staff | The state of the registered office, and the filing point confirmed before the first grant |
| Bengaluru | Software, product and data roles, where equity is a common part of technical offers and the pool is tested against competing packages | The Registrar where the company files, and the employee count used for any threshold in the scheme |
| Delhi | Consumer, services and corporate function roles, benchmarked against national salary surveys | The Registrar where the company files, and the state of the registered office |
| Gurugram (Gurgaon) | Consulting, fintech, retail and corporate roles, benchmarked against the wider Delhi NCR market | The state of the registered office, which may differ from the state where the team works |
Use the company’s own hiring benchmarks
The table is a commercial guide, not a statistic. It describes where the benchmark for each role is usually taken, and it does not give a salary or a pool size for any city. A company should test the pool against its own offers and its own competitors for each role, and should not rely on a city average. The point that matters most is that a company with staff in several cities has one scheme, one set of rules and one cap table, and the local benchmarks only shape the size and the vesting of the grants.
Three questions to ask for any city
- Which roles are hard to fill locally, and what does the competing offer include beyond salary?
- Which state is the registered office in, and where does the company file its returns and its share allotments?
- Will employees in another city be eligible for the same grant, and does the FEMA position change for any non-resident employee?
What Are the Common ESOP Mistakes in Growing Companies, and How Are They Avoided?
The mistakes below recur in private companies that grant options without a full plan. Each one is easy to avoid when it is caught before the first grant, and each one is costly to correct afterwards. The tickets set out the mistake, its effect and the fix.
Granting options before the special resolution
The board approves grants before the shareholders approve the scheme, so the grants rest on an approval that does not yet exist.
Grants may be defective and hard to cure after allotmentApprove the scheme and the pool by special resolution, with the explanatory statement, before any grant letter is signed.
Ignoring the perquisite and the TDS on exercise
The employer records the exercise as a share allotment and does not compute the perquisite taxed as salary, or the tax deducted on it.
Short deduction, interest and a dispute with the employeeObtain the exercise-date fair market value, compute the perquisite per share, and apply the salary-withholding requirements, including any eligible-startup deferral, when processing the exercise.
Sizing the pool without a hiring plan or a dilution model
The pool is set at a round figure chosen in a meeting, with no list of hires and no model of the dilution across later rounds.
The pool runs out before the key hires, or it dilutes the owners for no retention gainBuild the pool model from the named hires, the grant schedule, the Ind AS 102 expense and the dilution after each planned round, and review it each year.
Closing Summary: Is Your Company Ready for an ESOP?
Yes, a growing private company should consider an ESOP scheme even with no IPO in view, provided the scheme is built in the right order. The company needs a special resolution, an eligibility-checked grant list that applies any qualifying-startup exemption, a supported fair value and a pool sized from its hiring plan. Once those are in place, the cost is charged to profit under Ind AS 102 over the vesting period, the perquisite on exercise is taxed as salary, and the holding period for capital gains runs from allotment.
A company that treats the scheme as a document to be signed once will meet the same problems at the next round, the next exercise and the next sale. A company that builds the pool model, the Valuation and the tax steps before the first grant can use the scheme for years, and can explain it to an investor, an auditor or a buyer without reopening the numbers.
Frequently Asked Questions About ESOPs
Does a private company need an IPO plan before it can grant ESOPs in India?
No. A private company can grant ESOPs under Section 62(1)(b) of the Companies Act, 2013, after a special resolution approving the scheme and a pool that meets the Share Capital and Debentures Rules, 2014. An IPO is not a legal condition for the scheme. The company should still plan the scheme as if it may be reviewed by an investor, an auditor or a buyer later.
Can a promoter receive stock options under a private company ESOP scheme?
Under the Share Capital and Debentures Rules, 2014, as read in commentary, promoters and the promoter group are not eligible for options under a private company scheme. Directors who hold more than 10 per cent of the outstanding equity are also excluded, subject to the start-up exemption for ten years from incorporation or registration. The eligibility of each grantee should be checked against the shareholding records on the grant date.
What approval is needed before a private company grants ESOPs?
The shareholders must approve the scheme and the pool by special resolution. The explanatory statement must disclose the total options, the eligible employee classes, the vesting terms and the exercise price method. Grants made before the approval are at risk, and a grant to an excluded person may have to be reversed. The approval should be in place before any grant letter is signed.
Is the ESOP cost charged to profit even when no cash is paid?
Yes. Under Ind AS 102, the fair value of an equity-settled option at grant is charged to profit or loss over the vesting period, with a matching credit to equity. No cash leaves the business for the option cost itself. The forfeiture assumption should be updated each year, and the expense schedule should be prepared at the time of the grant.
Is the perquisite on exercise taxed as salary?
On exercise, the perquisite equals the fair market value of the share on the exercise date, less the exercise price the employee pays. It is taxed as salary, and the employer deducts tax at source. For unlisted equity, Rule 15(6) requires a SEBI-registered Category I merchant banker; the permitted specified date and report should be documented before allotment.
Does each exercise need a fair market value of the shares?
Yes. Each exercise requires the fair market value of the unlisted shares on the exercise date, because that value sets the perquisite and the cost base for the later capital gain. The valuer category, the rule applied and the report date should be confirmed for each exercise. A value that is documented only at grant is not enough for the exercise.
When does the holding period for capital gains start on ESOP shares?
For ESOP shares, the holding period is reckoned from the date the shares are allotted or transferred to the employee, not from the option grant date. Unlisted equity shares generally become long-term capital assets when held for more than 24 months under Section 2(101) of the Income-tax Act, 2025. Check the applicable classification and tax treatment if the shares become listed or special provisions apply.
How large should an ESOP pool be for a growing company?
There is no single legal percentage in the sources we reviewed, so the pool is a commercial decision. It should be sized from the named hires for the next two years, the value each role should receive, the Ind AS 102 expense and the dilution after each planned round. The pool model should be reviewed each year, and any top-up should be shown in the round model before it is discussed with investors.
Does the city change the ESOP rules for a company in Pune, Mumbai, Ahmedabad, Bengaluru, Delhi or Gurugram?
The city does not change the legal steps. The Companies Act, 2013, the Income-tax Act and the FEMA rules apply across India. The city changes the hiring market, the salary benchmark for each role and the Registrar of Companies where the company files. Those points shape the size and the vesting of the grants, so the pool should be tested against the offers the company faces in each city where it hires.
Who should prepare the Valuation for an ESOP scheme in India?
The required professional depends on the purpose. Grant-date option fair value and the accounting schedule require the appropriate accounting and valuation expertise. For unlisted-equity employee perquisites, Rule 15(6) requires a SEBI-registered Category I merchant banker. Confirm the appointment, credentials, independence and written scope for each report. Elite Valuation coordinates the valuation and advisory work; its founder is a CA, CS and IBBI-Registered Valuer with 9 years at Ernst & Young.
Sources
Use these official references with amendments applicable to the company, recipient and transaction date. Accounting and employee-perquisite valuations have different purposes and professional requirements.
- Companies Act and rules — Ministry of Corporate Affairs. Section 62(1)(b), Rule 12, approvals, eligible grantees and allotment requirements.
- Startup regulatory updates — Government of India. The extension of the ESOP promoter/director exemption from five to ten years for qualifying startups.
- Income-tax Act, 2025, amended by Finance Act 2026. Section 2(101) holding periods; Section 17 employee perquisites; Section 392 salary withholding; Sections 392(3) and 289(3) eligible-startup deferral.
- Income-tax Rules, 2026 — notified text. Rule 15(6) and the specified-date provisions for equity-share employee perquisites.
- Indian Accounting Standards compendium — ICAI. Ind AS 102, including vesting conditions and measurement; confirm the framework applicable to the company.
Plan the ESOP Pool, the Valuation and the Tax Steps Before the First Grant
Elite Valuation prepares the pool model, the grant-date fair value, the Ind AS 102 expense schedule and coordinates the required merchant-banker valuation for unlisted-equity perquisites, so the scheme, the accounts and the return carry the same numbers from the first grant.
Book an ESOP Scope CallESOP Advisory | Option Fair Value | Ind AS 102 Expense | Employee Perquisite Valuation | Exercise-Date Valuation
Disclaimer. This article is general information only. It is not legal, tax, accounting or investment advice, and it is not a Valuation of any company, share or grant. The figures in the tables and the illustrations are hypothetical and do not describe any company or employee. The Companies Act, the Share Capital and Debentures Rules, the Income-tax Act, the FEMA NDI Rules and Ind AS change, and the points flagged in the sources must be checked against the current text before reliance. Research date: 24 October 2026. Confirm each point with a qualified professional before relying on it.
