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
25-September-2025

When you think about what truly motivates employees to stay with a company, salary is only part of the story. More and more businesses are offering stock-based compensation as a way to build loyalty, create wealth, and reward performance. Two popular choices are Employee Stock Option Schemes (ESOS) and Employee Stock Ownership Plans (ESOP).

Both sound similar, but they work very differently. One gives employees the right to purchase shares at a set price in the future, while the other offers direct ownership today. Let’s break this down so you can clearly understand ESOS vs ESOP, how they work, and why companies use them.

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What are ESOS and ESOP?

At first glance, ESOS and ESOP look alike, but there is a key difference in ownership.

  • ESOS allows employees to purchase shares of the company at a pre-decided price after a vesting period. If the stock price rises, employees can buy low and benefit from the appreciation.

  • ESOP, on the other hand, gives employees actual shares as part of their compensation. They become part-owners straight away, often receiving dividends as well.

Both reward employees, but the mechanics are different one is about future potential, the other about present ownership.

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Key features of ESOS

Here is what makes ESOS unique:

  • Right to purchase: Employees can buy shares at a fixed price, no matter what the market price is later.

  • Vesting period: You need to stay with the company for a certain time before you can exercise your options.

  • No ownership until exercised: You only own the shares once you actually buy them.

  • Performance-driven: Companies often use ESOS to reward hard work and results.

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

So, how do these two plans really compare?

  • Ownership: ESOS gives you the right to buy shares later, ESOP makes you a shareholder now.

  • Risk vs reward: ESOS involves risk if the stock price falls, while ESOP gives immediate value.

  • Motivation: ESOS is performance-focused, ESOP builds long-term loyalty.

  • Wealth creation: Both can help employees build wealth, but in different ways.

In short, ESOS is about potential gains, while ESOP is about instant ownership. Companies often use one or both, depending on their goals.

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Tax implications of ESOS and ESOP

Taxes are an important factor to consider. Here is how it works:

  • At exercise (ESOS): When you buy shares, the difference between the fair market value and the exercise price is taxed as a perquisite.

  • At allocation (ESOP): When you receive shares, tax may apply depending on valuation and timing.

  • On sale: Whenever you sell the shares, capital gains tax applies based on whether they’re short-term or long-term holdings.

Planning ahead ensures you don’t face unexpected tax liabilities.

Why companies choose stock-based plans?

Companies use ESOS and ESOP as strategic tools to build loyalty and align employees with business success.

  • To attract and retain top talent.

  • To align employee interests with company growth.

  • To reward long-term commitment and loyalty.

  • To create a sense of ownership and responsibility.

How can employees maximise benefits?

With the right approach, employees can turn stock-based compensation into long-term financial growth and security.

  • Keep track of vesting schedules and timelines.

  • Understand tax implications before exercising options.

  • Diversify your portfolio instead of relying only on stock-based compensation.

  • Consider financing options to make the most of ESOS or ESOP benefits without draining savings.

Conclusion: Choosing between ESOS and ESOP

Both ESOS and ESOP are powerful ways to connect employees to a company’s future. ESOS motivates performance by offering potential gains, while ESOP creates instant ownership and loyalty. Choosing between the two depends on whether the company values performance-driven rewards or long-term commitment. For employees, the real question is how to make the most of these benefits. With the right planning and smart financing, you can turn your stock options into long-term wealth.

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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.

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.

How does vesting work in ESOS and ESOP?

Vesting in ESOS/ESOP means employees earn rights to options or shares over time, often linked to tenure or performance. Only after the vesting period can employees exercise stock options or claim ownership.

Can ESOS or ESOP be offered to contract employees?

Generally, ESOS/ESOPs are offered only to permanent employees and directors, excluding promoters. Contractual employees and consultants are not typically eligible unless specifically approved by company policy and regulations.

Are ESOS and ESOP regulated by SEBI in India?

Yes. Listed companies issuing ESOS/ESOP must comply with SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. These rules cover grant, disclosure, vesting, and accounting standards to ensure transparency and fairness.

When do employees pay taxes on ESOS vs ESOP? (timing-focused)

For ESOS, tax applies when options are exercised, based on the difference between market value and exercise price. For ESOP shares, taxation occurs both at exercise (perquisite tax) and later at sale (capital gains).

What are the risks involved in ESOS and ESOP?

Risks include share price volatility, dilution of ownership, lock-in restrictions, and potential taxation burdens. Employees may also face reduced benefits if company performance declines or if they exit before full vesting.

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