ESOS vs ESOP: Understanding the Difference

Learn the clear differences between ESOS and ESOP. Understand how these employee programs differ and why it matters.
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3 mins read
23-May-2025

 

Employee stock-based compensation plans, such as ESOS and ESOP, have become popular tools for rewarding and retaining employees. These plans provide employees with either the option to purchase shares or an ownership stake, aligning their interests with the company’s success.

What are ESOS and ESOP?

Employee Stock Option Schemes (ESOS) allow employees to purchase company shares at a predetermined price after a vesting period, giving them the potential to benefit from future stock price appreciation. Employee Stock Ownership Plans (ESOP), on the other hand, provide employees with shares of the company as part of their compensation, granting them direct ownership. Both schemes are designed to incentivise employees, but they differ in terms of ownership and structure.

Key features of ESOS

  • Right to purchase: Employees have the option to buy company shares at a fixed price.

  • Vesting period: Employees must complete a specific tenure before exercising their options.

  • No ownership until exercised: Employees do not own shares until they purchase them.

  • Incentive for performance: ESOS encourages employees to contribute to the company’s growth.

Key features of ESOP

Here are the key features of ESOP:

  • Direct ownership: Employees are granted shares without having to purchase them.

  • Vesting schedule: A set period before employees can fully own their shares.

  • Long-term incentive: Provides an immediate stake in the company’s success.

  • Dividend potential: Employees may receive dividends on their shares.

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ESOS vs ESOP: A comparative analysis

While ESOS gives employees the right to purchase shares, ESOP provides direct ownership. ESOS requires employees to buy shares at a later date, allowing them to benefit from price appreciation, while ESOP grants employees immediate ownership with potential for dividends. ESOS is typically performance-driven, whereas ESOP promotes long-term commitment and shared success through ownership.

Tax implications of ESOS and ESOP

The tax implications of ESOS (Employee Stock Option Scheme) and ESOP (Employee Stock Ownership Plan) arise at two stages—when the option is exercised and when the shares are sold. At the time of exercise, the difference between the fair market value (FMV) and the exercise price is taxed as a perquisite under salary income. Later, when the employee sells the shares, capital gains tax is applicable based on the holding period and the nature of the gains—short-term or long-term.

Conclusion: Choosing between ESOS and ESOP

Choosing between ESOS and ESOP depends on the company’s goals and the type of incentives it wants to offer. ESOS is ideal for companies focused on performance-based rewards, while ESOP fosters long-term loyalty by providing employees with a direct ownership stake. Each plan offers unique benefits, and understanding these differences helps companies select the right option to align employee motivation with business objectives.

Frequently asked questions

What is the meaning of ESOS?
Employee Stock Option Scheme (ESOS) is a compensation plan that gives employees the right to purchase company shares at a predetermined price, typically after a vesting period, allowing them to benefit from future stock appreciation.

What are the benefits of ESOS?
ESOS benefits employees by offering potential financial gains through stock price appreciation, promoting retention through vesting periods, and aligning employee interests with company success. It also incentivises performance and rewards long-term commitment.

What is the difference between ESOS and ESOP?

ESOS gives employees the right to buy shares at a fixed price after a vesting period. ESOP, on the other hand, grants actual ownership or shares, often without requiring purchase.

Does ESOS affect employee ownership or motivation?

Yes, ESOS can significantly boost motivation by aligning employee interests with company growth, though actual ownership only comes after exercising the options.

How does ESOS differ from ESOP in terms of employee ownership?

ESOS offers potential ownership after purchase, while ESOP provides direct ownership benefits, often as a reward, without requiring employees to pay upfront.

Who is eligible for ESOS and ESOP in India?

Typically, permanent employees, directors (excluding independent directors), and certain consultants are eligible. However, eligibility criteria can differ by company policy and plan structure.

What are the tax implications of ESOS vs ESOP?

In ESOS, tax applies at exercise (as a perquisite) and at sale (as capital gains). ESOPs are taxed as capital gains upon sale, depending on how the shares were allocated.

Which is better for startups: ESOS or ESOP?

Startups often prefer ESOS for managing cash flow while motivating key talent. ESOPs are better for long-term retention and building a strong ownership culture.

Can a company offer both ESOS and ESOP?

Yes, a company can offer both schemes, depending on strategic goals. Combining them allows flexibility in talent acquisition, retention, and aligning long-term interests.

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