India: Share-Based Employee Benefits Explained

By Suma R.V. - King Stubb & Kasiva

April 4, 2023


Share-based employee benefits are becoming increasingly popular with many India businesses offering them to retain, reward or inspire their employees. These allow employees to participate in their company’s ownership and growth. On the other hand, helps employers to retain talent. This can be a powerful motivator for employees to work hard and contribute to the company’s success.

In India, the employees are incentivized by offering them the stock option or paying the benefits associated with the stock option in different ways. Different ways in which the employees are incentivized by issuance of stock option or paying the benefits associated with the stock options are:

Employee Stock Option Plan (“ESOP”)
It is a plan in which a company gives employees the option to buy a certain number of shares at a predetermined price within a certain timeframe. There will be a vesting period, post which the employee can exercise the option granted to him.

Employee Stock Purchase Scheme (“ESPS”)
It is a scheme that allows employees to buy company stock at a lower price than the current market price. The shares issued under the ESPS will typically have lock-in period, restricting the employee from transferring the shares within such lock-in period.

Restricted Stock Units (“RSU”)
It is a type of issuance of equity to an employee in which an employee has the right to receive company shares at a later date or upon meeting specified performance goals. The RSUs will be subject to vesting schedules.

Restricted Stock Award (“RSA”)
It is a grant of company stock that is subject to restriction on transfer/sale until the vesting period is over. These stocks may be issued basis the performance of the employee.

Phantom Stock Option Schemes (“PSOS”)
It is a form of incentive scheme in which an employee receives a cash payment on the value of the stocks or mere appreciation value, without receiving any company shares, over a specified period of time; and the payment may be subject to fulfilment of conditions agreed between the company and employee.

Stock Appreciation Rights (“SAR”)
It allows employees to earn a cash payment proportional to the increase in the value of the company’s stock. An appreciation in stock price of specified number of stocks granted to an employee will be paid to the employee after the vesting period is over, without issuance of the shares of the company.

Apart from the above, the companies may issue “Sweat Equity Shares” to directors or employees. Sweat equity shares are issued at a discount, or for non-cash consideration such as providing the company with know-how or assigning intellectual property rights or for other value additions.

Indian laws also recognize share-based “General Employee Benefits Schemes or GEBS” and “Retirement Benefit Scheme or RBS”. GEBS are framed for the welfare of the employees, including healthcare benefits, hospital care or benefits, or benefits in the event of sickness, accident, disability, death or scholarship funds, or such other benefit as specified by the company. Whereas, RBS aims at providing retirement benefits to the employees.  However, the existing laws are not specific as to the framing and administration of these benefits plans.


Employee stock options and stock incentives provide numerous advantages to both individuals and companies. Employees have a financial incentive to work more and perform better since they profit directly from the company’s success. Employers can use stock incentives to attract and retain top talent while also aligning employee interests with the company’s long-term success.

They also provide various additional benefits such as the employees participation in the growth and success of the company for which they work, which may be a huge motivation, and instills a sense of ownership in employees, which leads to increased job satisfaction and loyalty. Furthermore, since the companies do not have to pay out cash bonuses, stock incentives are a cost-effective way for them to compensate staff.


Various laws and regulations control the regulatory framework for employee stock incentives in India. The Companies Act, 2013 regulates the issuance of shares and stock option. The Securities and Exchange Board of India (“SEBI”) Guidelines regulate the extension of equity shares and share based benefits in the listed companies. The guidelines explain inter alia the prerequisites for granting options or shares, their vesting period, lock-in period and the price system.

These benefits are also taxed under the Income Tax Act, 1961. Each share-based employee benefit may have different tax implications depending on the type of plan and when the options are exercised/ payments are made.

Companies must also follow the Foreign Exchange Management Act, 1999, which oversees the repatriation of funds in the case of foreign employees.


Overall, the regulatory structure for employee stock options is slightly complex, necessitating careful study and compliance on the part of businesses. To prevent legal or tax problems, companies must verify that their share-based benefit plans comply with all applicable rules and regulations.

While each share-based employee benefit plan may have regulatory restrictions and tax implication different from other, they provide unique benefits that may be adjusted to the company’s and its employees’ needs. Companies thinking about introducing ESOPs can assess their alternatives and obtain professional guidance to guarantee compliance with applicable laws and regulations.

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