An ESOP is a scheme under which a company grants options to its employees to purchase shares at a future date at a pre-determined price. Section 62(1)(b) governs the issue of shares to employees under a scheme, and the scheme requires the shareholders’ approval by special resolution.
The Scheme and Approval
The ESOP scheme must be approved by the shareholders by special resolution, and the explanatory statement must disclose the total number of options, the identification of the eligible employees, the vesting period, the exercise price and the lock-in. The board administers the scheme through a compensation or nomination and remuneration committee. The MGT-14 is filed with the special resolution, and the PAS-3 is filed on allotment.
The Trust Structure
An ESOP trust is often used to hold shares for future allotment to employees. The trust acquires the shares from the company or the secondary market, and the trustee transfers them to employees on exercise. The trust structure requires careful documentation: the trust deed, the trustee’s role, the funding and the treatment of the shares held by the trust.
The Tax Treatment
The perquisite tax is triggered at exercise, on the difference between the fair market value on the exercise date and the exercise price. The subsequent sale attracts capital gains, with the fair market value on exercise as the cost of acquisition. The Finance (No. 2) Act, 2025 changed the capital-gains framework effective 2 January 2026, and the ESOP tax position should be read with the revised rates and holding-period rules.
The Practical Discipline
The company should maintain the scheme document, the grant letters, the vesting records and the exercise records. The tax withholding at exercise and the reporting in the employee’s Form 16 should be coordinated. The trust structure should be documented separately from the scheme, and the trustee’s holdings should be reconciled with the scheme’s share reserve.
Call to Action: We advise companies on ESOP scheme design, trust structuring and the perquisite and capital-gains tax treatment. For an ESOP review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.