What Are the Different Types of Stock Option Plans in India?
Indian companies can offer five types of stock option plans. Standard ESOPs give employees the right to buy shares at a fixed price. Liquidity-Event ESOPs defer that right until an IPO or acquisition. Trust-Based ESOPs use a trust structure to hold shares. Phantom Stock / SARs pay cash rather than shares. RSUs grant shares matically on vesting - no purchase needed.
Here is a brief profile of each plan type:
Standard Stock Option Plan (ESOP)
The most common structure. Employees receive the right to buy shares at a fixed (often discounted) exercise price after a vesting period. They become shareholders only when they exercise. This is the classic ESOP governed by the Companies Act 2013, and for listed firms, SEBI's share-based employee-benefit rules.
ESOP Exercised Only at a Liquidity Event
Functions like a standard ESOP, but the plan design restricts exercise to a predefined event such as an IPO, acquisition, or buyback. This is often just a clause in the grant-letter or ESOP trust deed, not a separate statutory category, yet it simplifies administration and defers the employee's economic benefit.
Trust-Based Stock Option Plan
Legal ownership of shares sits with a private irrevocable trust, while employees receive beneficial ownership once they exercise. This structure is increasingly popular among Indian startups and larger companies because it keeps the cap table clean and streamlines cross-jurisdictional grants, though it adds setup and compliance overhead.
Phantom Stock Units / Stock Appreciation Rights (SARs)
Employees receive a cash payout linked to the appreciation in share value, without ever owning actual shares or shareholder rights.
From an Indian tax perspective, SARs are generally treated as a perquisite and taxed as perquisite tax at payout, which differs from capital-gains treatment on ESOPs. This structure is also flexible in eligibility, allowing companies to include consultants, advisors, and other non-employees.
Restricted Stock Units (RSUs)
Shares (or units convertible to shares) are granted automatically on vesting; there is no purchase price to pay. When the units vest, the FMV of the shares is treated as a perquisite under the "income from salary" head, and many companies deduct TDS on that amount. The capital-gains clock then starts from the vesting date for purposes of later sale.
How Do These Different Types of Stock Option Plans Compare Across Key Criteria?
Across ten criteria - Structure, Eligibility, Vesting, Exercise, Shareholder rights, Exit, Administration, Termination, Tax on Exercise and Tax on Sale - the five plans differ significantly. Standard ESOPs offer the most direct path to ownership. SARs are the least complex to manage. RSUs are the most straightforward for employees. The right choice depends on your company's stage, cash position, and HR strategy.
The table below compares all 5 stock option plans across every key dimension:
| Aspect | Standard ESOP | Liquidity-Event ESOP | Trust-Based ESOP | Phantom Stock / SARs | RSUs |
|---|---|---|---|---|---|
| Structure | Employees buy shares at a fixed discounted price in the future, gaining ownership at a lower cost. | Same as standard, but options are only exercisable at a predefined liquidity event (IPO or acquisition). | A private trust holds legal ownership; beneficial ownership transfers to employees on exercise. | Employees receive cash equal to share value appreciation - no actual shares involved. | Shares are granted automatically upon vesting. No purchase required by the employee. |
| Eligibility | Employees and directors. Promoters cannot participate. | Employees and directors. Promoters cannot participate. | Employees and directors. Promoters cannot participate. | No restrictions. SARs can also be granted to consultants and advisors. | Employees and directors. Promoters typically cannot participate. |
| Vesting | Time, performance, or exit parameters. Minimum 1-year cliff, typically 4-year vesting. | Same as a standard ESOP. | Same as a standard ESOP. | Same as a standard ESOP. | Time-based, performance-based, or a combination of both - per a predetermined schedule. |
| Exercise & Period | Vested options must be exercised within a defined period or they lapse. | Vested options can only be exercised during a liquidity event (merger, IPO, acquisition, or buyback). | Similar to a standard ESOP. | No exercise. The appreciated value is paid out at a liquidity event or as specified in the SARs plan. | No exercise required. Shares are delivered automatically upon vesting. |
| Shareholder Rights | Granted only after options are exercised. | Granted only after options are exercised. | Granted on exercise - beneficial ownership transfers to employees at that point. | No shareholder rights. SARs do not involve actual shares. | Granted once shares are delivered on vesting - including voting rights and dividends. |
| Exit Issues | Company must manage share sales during an acquisition, which can be complex. | Lower risk - exercise only at a liquidity event, though employees may remain on cap table post-exercise. | Complex - potential issues if the trust holds excess shares beyond exercise events. | Company must fund cash payouts, similar to managing buybacks or option cancellations. | Generally straightforward - shares automatically delivered on vesting reduces exit complexity. |
| Administration | Complex - issuing share certificates, updating the Register of Shareholders, potential buybacks. | Simplified - exercise only happens at a liquidity event. | Complex - trust management, audits, and regulatory filings required. | Least complex - focused on calculating and paying the appreciated value. | Simple - shares issued automatically on vesting without additional transactions. |
| Termination | Vested options can be exercised; unvested options lapse. Outcome depends on separation type. | Options lapse if the employee leaves before a liquidity event. | Simpler - no actual shares involved in the termination process. | No impact on termination - employees hold no actual shares. | Unvested RSUs lapse; vested RSUs are delivered even if the employee has already left. |
| Tax at Exercise / Vesting | Perquisite tax (salary income) deducted at source on the value of options exercised. | Perquisite tax at exercise during the liquidity event. | Perquisite tax at exercise. | Taxed on the cash amount paid - deducted at source when payment is made. | Ordinary income tax on the fair market value of shares on the vesting date. |
| Tax on Sale (Capital Gains) | Capital gains tax on holding period: long-term (>2 years) or short-term (<=2 years) from exercise date. | Similar to a standard ESOP for IPOs or acquisitions. | Same as a standard ESOP for capital gains. | No sale of shares, so no capital gains tax applicable. | Capital gains tax applies based on holding period after shares are vested and delivered. |
How Is Each Stock Option Plan Taxed in India?
ESOP-based plans trigger perquisite tax at exercise - taxed as salary income and deducted at source. RSUs trigger ordinary income tax at vesting on the fair market value of shares received. SARs trigger salary tax when the cash is paid out. Capital gains tax applies on sale for any plan involving actual shares, based on how long you held them.
Here is a clear summary of how each plan is taxed:
| Plan Type | Tax Trigger | Tax Category | Capital Gains on Sale? |
|---|---|---|---|
| Standard ESOP | At exercise | Perquisite tax | Yes - STCG or LTCG based on holding period from exercise date |
| Liquidity-Event ESOP | At exercise (liquidity event) | Perquisite tax | Yes - similar to standard ESOP for IPO / acquisition scenarios |
| Trust-Based ESOP | At exercise | Perquisite tax | Yes - same as standard ESOP for capital gains |
| Phantom Stock / SARs | When cash is paid out | Salary income | No - no actual shares; no capital gains tax applicable |
| RSUs | At vesting (on FMV of shares) | Ordinary income | Yes - STCG or LTCG based on holding period from vesting date |
Note: For unlisted shares (typical in private startups), the long-term threshold is 24 months, taxed at 12.5% with indexation benefit. Tax rules are subject to change - always verify with a CA.
How An Employee Can Evaluate Different Types of Stock Option Plans in India?
To evaluate different types of stock option plans, the key question is: when will you benefit, and how? ESOPs and RSUs give you actual shares. SARs give you cash. Your tax trigger, vesting timeline, and exit conditions all determine how much real value you'll see.
Here's an easy-language breakdown:
Received ESOPs? You have the right to buy shares at a fixed price after vesting, not the shares themselves yet. You'll pay perquisite tax when you exercise, and capital gains tax when you eventually sell.
Received RSUs? Shares are delivered to you automatically on vesting. No purchase needed. Your employer deducts TDS at vesting, so your tax is handled upfront.
Receiving SARs? You get a cash payout equal to the rise in share value. No shares are involved, so there's no capital gains tax - just income tax when the cash arrives.
Which Type of Stock Option Plan Is Right for Your Company?
There is no single best plan. Standard ESOPs suit early-stage startups building an ownership culture. Liquidity-Event ESOPs simplify day-to-day admin. Trust-Based ESOPs work for companies with governance infrastructure. SARs offer the broadest eligibility without equity dilution. RSUs deliver the simplest employee experience where shares arrive automatically on vesting.
Here's an easy-language breakdown:
- Choose Standard ESOPs if you want employees to have direct ownership and the flexibility to exercise at any time after vesting.
- Choose Liquidity-Event ESOPs if you want to simplify day-to-day administration by restricting exercise to exit or IPO scenarios.
- Choose Trust-Based ESOPs if your company has the governance infrastructure to manage a trust and wants to formalise the plan structure.
- Choose Phantom Stock / SARs if you want to incentivise a broad group - including consultants and advisors - without diluting equity or adding shareholders to your cap table.
- Choose RSUs if you want the simplest possible employee experience - shares are delivered automatically and employees do not need to make a purchase decision.
Choosing the right equity plan is one of the most consequential decisions a founder makes. The wrong structure creates admin overhead, compliance gaps, and confused employees - problems that compound as your team grows.
Hissa supports all five plan types of stock option plans. Plan, set up, administer, and track ESOPs, RSUs, and SARs in one platform with built-in compliance, employee communication, and a liquidity pathway through the Hissa Fund for employees who want to monetise before an IPO.