ESOP for Unlisted Companies

Tax is deducted by the employer at exercise under Section 192 of ITA 1961 (Section 392 under ITA 2025 for TY 2026-27 onwards). The perquisite value is the fair market value (FMV) on the date of exercise minus the exercise price paid. For unlisted companies, FMV is determined by a merchant banker valuation under Rule 3(8)(c) of the Income-tax Rules, 1962. Employees of eligible start-ups can defer TDS on ESOPs for up to 48 months from exercise, or until a liquidity event, whichever is earlier, under the proviso to Section 192(1C).

On sale, capital gains are computed under Section 45 of ITA 1961 (Section 67 under ITA 2025). Cost of acquisition is the FMV used for perquisite valuation at exercise. Holding period starts from the date of allotment: less than 24 months = short-term capital gains taxed at slab rates; 24 months or more = long-term capital gains taxed at 20% with indexation under Section 112. Unlisted shares do not qualify for the concessional 10% LTCG rate under Section 112A, which requires STT payment on a recognised exchange.

ESOPs in private companies are governed by Section 62(1)(b) of the Companies Act 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A special resolution of shareholders is mandatory before any grant. The scheme must specify grant price, vesting schedule, exercise period, and lock-in. On each allotment, Form PAS-3 (return of allotment) must be filed with the Registrar of Companies within 30 days under Rule 12(10). One-person companies and Section 8 companies cannot issue ESOPs.

FMV must be certified by a SEBI-registered Category I Merchant Banker at two stages: (1) at grant, to fix the exercise price and document the discount, if any; and (2) at the date of exercise, for computing the perquisite under Rule 3(8)(c) of the Income-tax Rules, 1962. The valuation report must be dated not more than 180 days before the exercise date. No prescribed form exists for the report, but it must document the methodology used (DCF or NAV).

Yes. Issue of ESOPs to non-resident employees (NRIs, OCIs, foreign nationals) by an Indian unlisted company constitutes FDI and must comply with pricing guidelines under Schedule I of the FEMA (Non-debt Instruments) Rules, 2019. The company must file Form FC-GPR with its AD Bank within 30 days of allotment. If a resident employee becomes NRI after allotment, the shares are treated as acquired as a resident and may be held on a non-repatriation basis under Schedule B of the NDI Rules, with no fresh FEMA reporting required.