Designing ESOPs in India: What Founders, CFOs, and CHROs Need to Know

Employee Stock Ownership Plans (ESOPs) have evolved into a sophisticated tool for attracting, retaining, and motivating talent in the Indian market. In 2025, they’re no longer just a “startup perk” but a strategic lever for aligning employee interests with business growth while meeting increasingly stringent compliance requirements. For founders, CFOs, and CHROs, the challenge lies in designing ESOPs that are both attractive to employees and sustainable for the company’s future.

Today, ESOP structuring in India demands more than just setting allocation percentages. It’s about ensuring that every element, from vesting schedules to performance triggers, aligns with both short-term operational needs and long-term growth. Investors, too, are scrutinising how ESOPs are managed, as poorly planned schemes can create dilution issues or misaligned incentives during funding rounds.

To put this into perspective, here’s how the ESOP design structure is shifting in 2025:

The taxation angle is where many ESOPs succeed or fail in creating real value for employees.  Under current Indian tax norms, employees generally face a dual tax burden:

1. Perquisite tax at exercise (based on the fair market value of shares)
2. Capital gains tax at sale (based on appreciation post-exercise)

However, for eligible startups, the income tax law provides relief by allowing deferment of the perquisite tax. Employees can postpone this tax liability until the earliest of: (i) five years from the year of exercise, (ii) the date of sale of shares, or (iii) the date they cease employment, whichever comes first.

This provision reduces the immediate financial pressure, though the eventual liability still exists. Forward-thinking companies are therefore:

1. Offering tax education sessions to employees
2. Timing grants and exercises strategically to optimise outcomes

3. Exploring trust structures or phased exercises to smoothen liabilities

The first quarter of 2025 has already shown a marked shift in ESOP allotment patterns. Rather than granting a lump sum at joining, companies are:

1. Issuing smaller, staggered grants over time
2. Linking vesting to both tenure and performance metrics
3. Keeping an equity reserve for future leadership hires

This conserves equity while ensuring that high performers remain engaged for the long haul.

Liquidity has also become a primary retention driver. In 2025, companies are actively creating liquidity programmes so employees can monetise part of their holdings through secondary transactions or structured buybacks. 

The complexity rises when companies with ESOPs aim for global expansion. Reverse flip mergers, overseas listings, and cross-border acquisitions introduce additional regulatory and tax hurdles. In these cases, planning ahead for:

1. multi-jurisdictional compliance,
2. foreign exchange considerations, and/ or
3. cross-border tax obligations is essential to avoid costly restructuring later.

Ultimately, ESOPs in India in 2025 are not “set-and-forget” schemes. They are dynamic instruments that require continuous review, transparent communication, and careful alignment with business objectives. Founders and leadership teams that design with foresight, balancing compliance, liquidity, and employee motivation, stand to gain a distinct advantage in both talent retention and investor trust.