How to manage employees' equity in India

In today's competitive business world, granting equity to your employees isn't just a recruitment strategy—it's an investment in your company's future. It motivates your team, fostering a shared sense of purpose and a commitment to the long-term success of your business. When your employees have a personal stake in your company, they're not just employees—they're partners. 

If you're operating in India, you might be wondering how to implement and manage equity plans effectively—and with complex local and regional regulations that can vary, it's no easy feat.

In this article, we'll break down the essentials and offer guidance on how to manage employee equity in India to help you navigate the nuances of the regulatory landscape. Let's get started.

Equity 101: stock options, RSUs, and ESPP

Before we dive into employee equity in India, let's define the most common types of equity compensation: stock options, RSUs, and ESPP.

  • Stock options give employees the right, but not the obligation, to buy a certain number of shares in the company at a predetermined price, known as the "strike price," within a specific period of time. Companies often offer stock options as part of a compensation or benefits package to incentivize employees and align their interests with those of the company. The advantage for employees is the opportunity to profit if the company's stock price rises above the strike price, allowing them to buy shares at a discount and potentially sell them at a higher market value.
  • Restricted Stock Units (RSUs) are a form of employee compensation that offers the right to receive shares of company stock after meeting certain conditions, often tied to time (known as vesting) or performance metrics. Unlike stock options, RSUs have intrinsic value from the start, even if the company's stock price drops. This means that RSUs provide a guaranteed level of compensation. However, until the RSUs vest, the employee doesn’t actually own the shares and, therefore, doesn’t have any shareholder rights (such as voting). Once vested, the RSUs are converted into company shares, which the employee then owns outright.
  • An Employee Stock Purchase Plan (ESPP) is a company-run program that allows employees to purchase company stock at a discounted price. ESPPs are often set up so employees contribute a portion of their salary over a predetermined period through automatic payroll deductions, making it a convenient way to invest in the company. At the end of that period, the accumulated contributions are used to purchase company stock at a discount, usually below the fair market value.

What are the rules for foreign companies granting equity awards to employees of their Indian entities?

When granting employees equity in India, it's crucial to stay compliant with local laws and regulations.

Under new rules introduced on August 22, 2022, employees and directors who receive shares under an Employee Stock Ownership Plan (ESOP) offered by a foreign company are considered to have received an Overseas Portfolio Investment (OPI) and the local Indian entity must comply with the requirements under the new Indian Overseas Investment Regulations (OI Regulations).

Under the new OI Regulations, foreign companies granting equity awards or stock purchase rights to employees and directors of their related Indian entities under an ESOP or similar plan must comply with the new general permission. There is no longer a separate exemption for cashless stock options or similar awards (such as RSUs).  

Further, the Reserve Bank of India (RBI) also revised the Master Direction—Liberalized Remittance Scheme (LRS Master Direction) in connection with its overhaul of the exchange control rules. The revised LRS Master Direction no longer applies to the acquisition and holding of shares in a foreign company by employees and directors of their related Indian entities under an ESOP, but requires that all such transactions be completed under the new OI Rules. 

Under the new general permission:

  • The ESOP must be offered on a globally uniform basis (e.g., on the same general terms as applicable to other subsidiaries of the issuing company); and
  • The Indian entity must now submit semi-annual reports on Form OPI to the RBI through its Authorized Dealer Bank. The reports are due for the periods ending March 31 and September 30 and must be submitted within 60 days after March 31 and September 30, respectively. 

Further, the repatriation requirements were modified such that, if an individual acquires securities that represent (in the aggregate) less than 10% of the company's share capital, the individual will be required to repatriate any proceeds related to the securities within 180 days of receipt (unless the amounts are reinvested by the individual in compliance with the new rules within the 180-day period). In the unlikely event that the individual acquires securities that represent (in the aggregate) 10% or more of the company's share capital, the individual will be required to repatriate the proceeds within 90 days of receipt. It remains the individual's responsibility to comply with the repatriation requirements.

Note: If you are using an Employer of Record (“EOR”) to hire employees in India, the applicable local rules and regulations may differ.

How do I assign equity to employees?

An equity compensation program serves multiple purposes: helping your company attract and retain talent, aligning employee incentives with company performance, and sharing the rewards of company success. The steps below give a brief overview of how to assign equity to employees.

1. Create an allocation strategy. You could distribute equity evenly among all employees, or weight it according to seniority, role, or performance. Keep in mind that equity is a finite resource, so you need to strike a balance between generous grants that motivate your employees and preserving enough equity for future needs, like hiring and fundraising.

2. Choose the type(s) of equity you want to offer. This could be stock options, RSUs, or participation in an ESPP. Each has its own implications for taxation, dilution, and administration, so you might want to consult with a financial advisor or attorney to understand what's best for your situation.

3. Establish a vesting schedule. Typically, equity awards vest over a period of time to encourage employees to stay with the company. A common vesting schedule is four years, with a one-year "cliff," meaning the employee receives no equity until they've been with the company for a full year.

4. Determine the exercise price. If you're offering stock options, you'll need to set an exercise price. This is usually the fair market value of the stock at the time the options are granted. It's important to get this right, as setting an exercise price that's too low could have tax implications.

5. Document your plan. Finally, be sure to document everything in an equity incentive plan that lays out the terms of the equity awards, and provide each participating employee with a grant agreement that details their specific award.

Taxes and deductions for employee equity in India




Taxation of employee

Tax on spread at exercise (fair market value of the shares must be determined by an Indian merchant bank, unless shares are listed in India).

Tax on sale.

Taxation of RS is unclear and depends on rights transferred upon grant. Tax at vesting for RSU. Taxable amount is the fair market value of the shares on the tax event (as determined by an Indian merchant bank, unless shares are listed in India).

Tax on sale.

Employee’s day-to-day work is overseen by the company, which can dictate how the work is done

Sub deduction

Allowed if subsidiary reimburses parent.

Reimbursement payment subject to exchange control restrictions.

Cash-netting to affect the reimbursement is not permitted.

Allowed if subsidiary reimburses parent.

Reimbursement payment may be subject to exchange control restrictions.

Cash-netting to affect the reimbursement is not permitted.

Agreement does not have a defined end date (though many countries permit fixed term employment agreements)

Withholding and reporting

Income tax: Yes.

Social security contributions: No.

Income tax: Yes.

Social security contributions: No.

Does participate in company processes; an employee’s work is considered integral to the business

Securities restrictions

Likely no, but application of Indian securities laws to non-Indian companies issuing equity awards is unclear.

Likely no, but application of Indian securities laws to non-Indian companies issuing equity awards is unclear.

Does not bear an economic risk

What information do I need to report on Form OPI?

Companies granting share-based awards to employees and directors of their Indian entities will need to determine if they can rely on the new general permission, and if so, be prepared to file the Form OPI on a bi-annual basis. Further, as the items to report on Form OPI are subject to interpretation, companies will need to discuss with their Authorized Dealer Bank how to complete the form.

The following information has to be reported on the Form OPI:

1. Net amount of ESOP investment held abroad (opening balance) at cost basis

2. Investments made during the half year (ended March / September) (including reinvestment)

3. Disinvestments made during the half year

4. Net amount of investments held abroad ((closing balance) 1 + 2 - 3)

5. Remittance amount

6. Repatriation amount

7. The report also requires a declaration by the Indian entity that includes: (1) the name of the foreign entity issuing/repurchasing the shares; (2) percentage interest and the shares or percentage interest allotted/repurchased during the relevant six-month period; and (3) the number of employees/directors who acquired and sold shares during the six-month period.

As the Authorized Dealer Bank has to submit the Form OPI on behalf of the company, companies will need to confirm with the bank how to complete the Form OPI.   

What are the penalties for late filings or failure to file a return?

Penalties apply for late filings and for failure to file a return. In the case of a late filing, the company may submit the required Form OPI through the Authorized Dealer Bank and pay a small late fee (INR 7,500 (approximately USD 93)) per return.

Where the company fails to file the Form OPI, there may be additional penalties under the Foreign Exchange Management Act, 1999 (FEMA). Any person who violates the provisions of the FEMA or any rule, direction, regulation, order or notification issued under the FEMA is liable for a penalty of up to three times the sum involved in such violation (where the amount is quantifiable) or INR 2,000,000 (Rupees two lakhs) (approximately USD 2,483) (where the amount is not quantifiable). Where the violation is ongoing, there is an additional penalty of up to INR 5,000 (Rupees five thousand) (approximately USD 62) for each day of non-compliance. 

Best practices for employee equity in India

Transparency and clarity are key when communicating your equity plan to employees. 

Make sure to clearly communicate the specifics of the plan, such as the type of equity being offered, vesting schedules, and exercise prices. It's also important to explain the potential advantages and risks associated with equity ownership, as well as the tax implications. 

Offering resources like workshops, informational sessions, or even one-on-one consultations can help employees understand the finer points of their equity packages. Remember, informed employees are more likely to feel valued and motivated, and they'll appreciate your efforts to help them make well-informed decisions about their equity. Your ultimate goal is to ensure that your team fully understands and feels confident in participating in the company's growth journey through the equity plan.

Rippling makes it easy to manage employees' compensation—including equity awards—all over the world. See Rippling.

Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.

last edited: August 11, 2023

The Authors

Barbara Klementz


Angélique M. Poret-Kahn

Associate, Baker & McKenzie LLP