In India, employee incentive plans generally fall into two broad categories: statutory incentives and non-statutory incentives.

Statutory incentives comprise benefits that employers are required to provide under applicable Indian labour laws. The most common statutory incentive is the statutory bonus payable under the Payment of Bonus Act, 1965, which applies to eligible employees earning below the prescribed wage thresholds. Employers must also ensure compliance with minimum wage requirements as notified from time to time. In addition, employees, particularly workmen, are entitled to statutory social security benefits such as provident fund, gratuity and other benefits prescribed under central and state labour legislation.

In November 2025, the Government of India implemented four new labour codes: the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 (“Labour Codes”). These codes consolidate and replace several existing labour laws, including the Payment of Bonus Act, 1965. While detailed implementing rules are still awaited, these reforms are expected to affect the manner in which minimum wages, statutory bonuses and other mandatory benefits are calculated and administered. Employers may therefore need to revisit their compensation structures once the final thresholds and rules are notified.

Non-statutory incentives are not legally mandated and are typically offered pursuant to employment contracts, incentive plan rules or internal policies. These incentives are more commonly extended to non-workmen, professionals and executive employees, and are designed to reward performance, retain talent and align employee interests with the commercial objectives of the organisation. For this purpose, non-workmen generally include personnel performing managerial, administrative or supervisory functions and earning remuneration above the applicable statutory thresholds.

Non-statutory incentives typically take the following forms:

(a) Short-term incentives (“STIs”): Short-term incentives are usually cash-based or in-kind rewards paid annually or at more frequent intervals. STIs are commonly offered across employee levels, with higher quantum or variability for senior or managerial roles. Typical examples include performance-linked bonuses, discretionary bonuses and profit-linked payouts. Employers may also offer non-cash benefits, such as allowances, work-from-home support, wellness programmes, club memberships and festive gifts or bonuses during occasions such as Diwali or Eid.

(b) Long-term incentives (“LTIs”): Long-term incentives are generally offered to senior management, key employees and critical talent. LTIs may be cash-based, such as retention bonuses or deferred performance bonuses, or equity-linked. Equity-based incentives commonly include employee stock options, restricted stock units, phantom stock and employee stock purchase plans. The availability and structure of such plans depend on factors such as whether the employer is a listed or privately held company and its financial and administrative capacity to implement equity-based arrangements.

Companies in India commonly implement the following types of equity-linked long-term incentive plans to reward and retain employees, particularly senior management and key talent:

(a) Employee stock option plans (“ESOPs”) grant employees the right to acquire shares of the company at a predetermined price, subject to completion of a specified vesting period. Employees benefit where the value of the company’s shares increases over time. ESOPs are widely used by both listed and unlisted companies and are governed by the Companies Act, 2013 and the rules made thereunder. Listed companies are additionally subject to provisions of Securities and Exchange Board of India (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021 (“SEBI SBEBS Regulations”).

(b) Restricted stock units (“RSUs”) entitle employees to receive shares upon the satisfaction of time-based or performance-based vesting conditions, without the requirement to pay an exercise price. RSUs are commonly used by listed companies and more mature private companies. While the Companies Act, 2013 does not expressly regulate RSUs for unlisted companies, issuances at a discount and related corporate approvals are generally guided by the principles set out under the Companies Act, 2013 and the rules made thereunder. RSUs offered by listed companies are subject to provisions of SEBI SBEBS Regulations.

(c) Stock appreciation rights and phantom stock units (“SARs”/PSU”) reward employees based on the appreciation in the value of the company’s shares over a specified period, without the issuance of actual shares. Payouts are typically cash-settled and, in certain cases, share-settled. These structures are commonly used to incentivise employees while limiting equity dilution. Stock appreciation rights and phantom stock plans are not specifically regulated under the Companies Act, 2013. However, listed companies must comply with the SEBI SBEBS Regulations.

(d) Sweat equity shares, are issued to employees or founders in consideration of the provision of know-how, intellectual property or other value additions to the company. Such issuances are subject to specific statutory conditions and are typically limited to senior leadership or founders, rather than being offered broadly to employees. Sweat equity shares are governed by the Companies Act, 2013 and the rules made thereunder, with listed companies being subject to provisions of SEBI SBEBS Regulations.

The structure and regulatory requirements applicable to these incentive plans are addressed in further detail in the subsequent responses.

Employee share purchase plans (“ESPP”) enable employees to acquire shares of the company through direct purchase, rather than through the grant and exercise of share options. Shares are typically offered at a discount to the prevailing market value and are commonly funded through periodic salary deductions or accumulated employee contributions. Employees derive economic value from the difference between the purchase price and the market value of the shares.

In India, employee share purchase plans raise certain practical and compliance considerations. In particular, salary deductions applied towards share purchases may affect the computation of ‘wages’ for the purposes of social security contributions under the evolving Labour Codes. Given the absence of settled guidance on the scope and interpretation of ‘wages’ under new Labour Codes, it is generally advisable to structure employee share purchase plans outside regular compensation frameworks in order to mitigate potential compliance risks.

In addition to equity-based incentives, employers in India commonly use other long-term incentive arrangements, such as deferred cash bonuses, multi-year performance incentives, deferred bonus plans, retention or loyalty bonuses, and cash-settled phantom stock or stock appreciation rights that mirror share value without issuing actual equity. These structures are often used where equity participation is not feasible, or where companies wish to limit equity dilution and regulatory complexity.

Equity-based incentives: Under the Companies Act, 2013, unlisted companies may offer employee stock option plans to permanent employees, directors (excluding independent directors), and employees of holding, subsidiary or associate companies, including overseas entities. Sweat equity shares may similarly be granted to permanent employees, directors (excluding independent directors), and employees or directors of group companies. Promoters, members of the promoter group, and directors holding more than 10% of the share capital of an unlisted company are generally excluded from participation in employee stock option plans and sweat equity issuances. However, start-ups are exempt from this restriction, and the Government of India permits promoters and promoter-directors to receive employee stock option plans for a period of up to 10 years from the date of incorporation, in both listed and unlisted companies.

In the case of listed companies, the SEBI SBEBS Regulations apply. Eligible participants include permanent and non-permanent employees, directors (excluding independent directors and directors belonging to the promoter group), and employees of group, subsidiary or associate companies, whether located in India or overseas.

In relation to sweat equity shares, a company may not issue more than 15% of its existing paid-up share capital in any financial year, nor more than 25% at any point in time. Certain categories of listed companies, as notified by the SEBI, may avail of an enhanced limit of up to 50%.

With the introduction of the Labour Codes and the expanded definition of ‘employee’, participation in schemes regulated by the SEBI SBEBS Regulations may also extend to contractual or gig workers for welfare or incentive programmes. Independent directors are not eligible to receive stock options, although profit-based commission arrangements are permitted.

Cash-based incentives: Cash-based incentives in India are largely discretionary and may be offered to employees across levels, including executives, senior management, directors and promoters. This is distinct from the statutory bonus, which is mandatory for employees or workmen who satisfy the prescribed eligibility thresholds under applicable Indian labour laws.

In the case of directors and senior management, companies have flexibility in structuring the quantum and timing of cash-based incentives, provided that total remuneration payable to any individual does not exceed the managerial remuneration limits prescribed under the Companies Act, 2013. These limits primarily apply to public and listed companies, and any payment in excess of the prescribed thresholds is subject to shareholder approval.

Unlisted private companies are not subject to these statutory managerial remuneration limits, which allows greater flexibility in granting discretionary cash-based incentives to directors, promoters and senior executives.

Yes. Indian law expressly permits incentive awards to be subject to performance conditions, vesting schedules and forfeiture provisions, provided that the relevant terms are clearly disclosed and applied uniformly under the applicable scheme. Under the Companies Act, 2013, a minimum vesting period of one year is mandatory for employee stock option plans. Further, in the case of other equity-linked benefits provided by listed companies, the SEBI SBEBS Regulations prescribe a minimum vesting period of one year.

In practice, vesting structures commonly include cliff vesting, graded vesting and non-uniform vesting. Time-based vesting is predominant across both listed and unlisted companies, while performance-based vesting is more commonly adopted by listed companies. Incentives for senior management and executive personnel are typically determined by the board of directors or the nomination and remuneration committee, using financial performance metrics such as revenue, profitability, cash flows and returns to assess employee performance. Environmental, social and governance linked metrics are emerging, although their adoption remains limited in practice in India.

Yes. Post-vesting and post-employment holding or lock-in requirements are legally permissible in India and are increasingly used as tools for retention, risk management and governance alignment, particularly in relation to senior employees and key talent.

Under the Companies Act, 2013, ESOPs are subject to a minimum vesting period of one year. While there is no mandatory statutory lock-in period following exercise, companies are expressly permitted to impose post-exercise holding or lock-in restrictions under their employee stock option plans or other equity-linked incentive arrangements. In practice, such restrictions are commonly used to promote long-term retention and alignment of employee interests with those of the company.

By contrast, sweat equity shares are subject to statutory lock-in requirements under the Companies Act, 2013. For unlisted companies, sweat equity shares are subject to a lock-in period of three years from the date of allotment. In the case of listed companies, sweat equity shares are subject to a lock-in period of one year for non-promoters, and one to three years for promoters, from the date of allotment, in accordance with the SEBI SBEBS Regulations.

RSUs frequently include additional conditions beyond vesting, such as post-vesting holding periods, deferred settlement or continued service requirements. Failure to satisfy such conditions may result in forfeiture or lapse of unvested or unsettled restricted stock units.

For cash-based long-term incentives, including deferred bonuses, retention bonuses and cash-settled phantom stock arrangements, post-vesting deferral and post-employment clawback or forfeiture provisions are commonly implemented through contractual arrangements.

These provisions are most prevalent in the technology, life sciences and financial services sectors, where competition for talent and retention risks is relatively high. In the financial services sector, regulated entities increasingly adopt deferral, holding and clawback mechanisms in line with remuneration and risk-alignment guidelines issued by regulators such as the Reserve Bank of India and the Insurance Regulatory and Development Authority of India.

Malus and clawback provisions are commonly used in incentive plans to address misconduct, performance failures or adverse risk outcomes. Malus provisions permit an employer to reduce or cancel unvested or unpaid incentives, for example by forfeiting unvested employee stock options, deferred bonuses or pending long-term incentive payouts where an employee engages in misconduct, breaches internal policies, or where performance results are subsequently found to have been overstated. Clawback provisions, by contrast, allow an employer to recover incentives that have already vested or been paid, such as requiring repayment of bonuses or gains realised from equity awards following a financial restatement, fraud or serious misconduct.

From an Indian legal and regulatory perspective, there is no general statutory requirement mandating the inclusion of malus or clawback provisions in all equity linked incentive plans. However, once equity incentives have been granted or vested, they cannot be modified to the detriment of employees unless such modification is expressly permitted under the terms of the relevant scheme and approved by shareholders, where required.

Separately, statutory bonus entitlements under the Code on Wages, 2019 operate independently of any incentive plans. Eligible employees are entitled to a pro rata statutory bonus for the period worked, subject to disqualification in cases of dismissal for specified misconduct, and such amounts are required to be paid within the prescribed statutory timelines.

In the case of listed companies, the inclusion of malus provisions, and less frequently clawback provisions, is influenced by corporate governance expectations under the SEBI regulations, which emphasise alignment of remuneration with long-term performance and risk outcomes. Therefore, as a matter of practice many listed entities include malus provisions, and in some cases clawback provisions, in employee stock option plans and long-term incentive arrangements as a matter of market practice.

In the banking and financial services sector, guidelines issued by the Reserve Bank of India on compensation structures require deferred variable pay for material risk-takers to be subject to malus and clawback, effectively making these mechanisms mandatory. Similarly, regulations issued by the Insurance Regulatory and Development Authority of India require insurers to incorporate malus and clawback mechanisms into variable remuneration, linked to risk management and solvency outcomes. Outside these regulated sectors, the inclusion of malus and clawback provisions remains discretionary.

From an enforcement perspective, Indian law generally permits forfeiture or recovery of incentive awards only where such rights are clearly and expressly agreed on a contractual basis. There is limited judicial precedent on the routine enforcement of clawback provisions in respect of vested equity awards. Consequently, malus provisions, which operate on unvested or unpaid incentives, are significantly more prevalent in practice than clawback provisions.

(i) on grant;

No income tax is payable at the time of grant of incentive awards (including ESOPs, RSUs, SARs or similar plans), as the grant represents a contingent right and does not result in any real income to the participant. The grant remains a notional benefit with no tax or contribution impact for the participant.

(ii) on vesting;

No income tax liability is triggered at vesting, since vesting merely confers the right to exercise or receive the award and does not result in any transfer of shares or cash. This position applies even in cases of graded or accelerated vesting. Similar to grant process, no social security contributions arise at vesting, as stock-based and performance-linked incentives are expressly excluded from ‘wages’ under the Labour Codes.

(iii) on exercise;

At the time of exercise of ESOPs or allotment of RSUs or sweat equity shares, the benefit is taxed as a perquisite under Section 17(2)(vi) of the Income-tax Act, 1961. The taxable value is the fair market value of the shares on the exercise/allotment date, reduced by the exercise price in the case of ESOPs (or the full fair market value for RSUs and sweat equity). The perquisite is taxed as salary at applicable slab rates for individuals, and the employer is required to withhold tax at source under Section 192. No social security contributions arise on the perquisite value.

A limited tax deferral is available only for employees of eligible start-ups certified by the Government of India, under which withholding and payment of tax on ESOP perquisites may be deferred, subject to statutory timelines. Outside this narrow category, tax is payable at exercise, often without liquidity to the employee.

(iv) on the acquisition, holding and/or disposal of any underlying shares or securities; and

The mere acquisition or holding of shares does not trigger any social security liability. On disposal of the shares, capital gains tax applies. The cost of acquisition is deemed to be the fair market value considered at the time of exercise or allotment. Gains are taxed as short-term or long-term capital gains depending on the holding period, with listed equity shares generally taxed at concessional rates if held long-term, subject to statutory thresholds. For cash-settled SARs or cash-based long-term incentives, the entire payout is taxed once as salary income at settlement, with no capital gains implications.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

An employer company may extend financial assistance, including loans, to employees in the ordinary course of employment in connection with incentive schemes. In practice, such arrangements are typically implemented through internal company policies or, in some cases, through employer-established trusts.

In practice, employers typically put in place appropriate documentation for such loans, including a formal loan agreement, a defined repayment schedule, and employee authorisation for recovery through salary deductions. Customarily, such loans are repaid through salary deductions which is capped (often at around 25% of monthly salary), particularly in large, listed company plans.

Under the Companies Act, 2013, a company may also provide financial assistance by way of loans to employees for the purchase or subscription of its own shares or debentures, subject to compliance with prescribed statutory conditions. Such loans are generally restricted to an amount not exceeding 6 months’ salary or wages and must be utilised solely for acquiring or subscribing to the company’s shares or debentures. Loans to directors are permitted only in limited circumstances, including loans to managing or whole-time directors where the facility forms part of uniform service conditions applicable to all employees or is granted pursuant to a scheme approved by shareholders. Regulated entities, including banks and other financial institutions, are subject to additional restrictions under applicable sectoral regulations.

Where loans are provided at concessional interest rates under incentive plans, the resulting interest benefit constitutes a taxable perquisite under Section 17(2)(viii) of the Income-tax Act, 1961 and is taxable as salary. Consequently, some employers either refrain from offering such loans or charge market-linked interest rates to avoid perquisite tax exposure. However, depending on the manner in which the loan is structured, such tax implications may vary. No social security contributions are payable on the value of such perquisites.

The tax treatment differs depending on whether the incentive is equity-settled (such as ESOPs, RSUs or equity-settled SARs) or purely cash-settled (such as bonuses, cash LTIs or cash-settled SARs), and both are addressed below.

(i) on grant;

No income tax consequence arises for the company at the time of grant of incentive awards. The grant does not constitute a taxable event under the Income-tax Act, 1961. From an accounting perspective, however, the company is required to recognise the fair value of the options or awards as an employee compensation expense over the vesting period in accordance with the applicable accounting standards.

Generally, no employer social security contributions arise, as incentive grants are notional in nature and do not constitute as a part of ‘wages’ under the Labour Codes. However, this treatment is contingent on appropriate plan structuring, and the inclusion of any fixed or deferred cash component may give rise to a risk of recharacterisation for social security purposes.

(ii) on vesting;

Vesting does not trigger any income tax liability for the company. The employer continues to recognise the share-based payment expense in its profit and loss account under the applicable accounting standards, but no tax deduction is available at this stage. From a compliance standpoint, vesting does not give rise to any withholding or contribution obligation.

As a general matter, employer social security contributions do not arise at the time of vesting, including in cases of graded or accelerated vesting, in respect of stock-based and performance-linked incentive awards, on the basis that such incentives do not fall within the definition of ‘wages’ under evolving Labour Codes. This position is, however, subject to the incentive plan being appropriately structured and not incorporating any element that could be characterised as fixed or guaranteed remuneration.

(iii) on exercise;

At the time of exercise or allotment, the company assumes a statutory withholding obligation. The perquisite value (being the difference between the fair market value on the exercise/allotment date and the exercise price, or the full fair market value in the case of RSUs or sweat equity) is treated as salary income of the employee, and tax must be deducted at source under the Income-tax Act, 1961. Correspondingly, the perquisite value is allowable as a business deduction for the company under the Income-tax Act, 1961 as employee compensation, in the year in which the shares are allotted or transferred. No employer social security contributions arise on the perquisite value.

While the deduction provides a tangible tax benefit to the employer, the withholding obligation is strict. Any failure or delay in deduction or deposit exposes the company to interest and penalty risk under the Income-tax Act, 1961. In the case of eligible start-ups, statutory deferral of tax deducted at source on ESOP perquisites may apply, as discussed in response 9(iii) above, indirectly easing retention and cash-flow pressures, though the eligibility threshold remains narrow.

(iv) on the acquisition, holding and/or disposal of any underlying shares or securities;

The company has no income tax or social security consequences once shares have been allotted or transferred to employees.

The acquisition, holding and subsequent sale of shares by employees fall entirely outside the employer’s tax base, and no further deduction is available to the company. The employee’s disposal of shares gives rise to an individual capital gains tax liability. In the case of equity-settled awards, the employer’s tax exposure effectively ends at the exercise or allotment stage. By contrast, for cash-settled stock appreciation rights or cash-based long-term incentives, the cash payout at settlement is generally deductible as a business expense under the Income-tax Act, 1961, with no capital gains implications.

(v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

If the company provides loans or interest subsidies to employees in connection with incentive plans, the cost of such subsidy is generally deductible as a business expense under the Income-tax Act, 1961, provided it is incurred wholly and exclusively for business purposes and structured on arm’s-length principles. Loans are generally treated as balance-sheet items (receivables) and do not constitute wages, thereby attracting no employer PF, ESI or gratuity liability under the Labour Codes.

Loans to directors are subject to stringent restrictions under the Companies Act, 2013, with limited carve-outs for managing or whole-time directors under uniform service conditions or shareholder approval, or where the company is in the business of lending. Regulated entities such as banks and non-banking financial companies (NBFCs) are further constrained by Reserve Bank of India norms prohibiting lending to directors and related parties. As a result, market practice strongly favours cashless exercise mechanisms or third-party financing arrangements over employer-funded loans, particularly for senior management and directors.

For cash-based incentives, the relevant taxable event is the payout date, at which point the entire amount is treated as salary income subject to tax withholding by the company, and is correspondingly deductible for the company as a business expense.

For unlisted companies, the core compliance framework is provided by the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014. The board of directors must first approve the scheme, following which a special resolution of shareholders is required under the Companies Act, 2013. This, in turn, triggers the obligation to file Form MGT-14 with the Registrar of Companies within 30 days of passing the resolution. The company is also required to maintain a statutory register of employee stock options in Form SH-6. In addition, the board must disclose the details of the ESOP scheme in the directors’ report annexed to the financial statements.

Upon allotment of shares pursuant to exercise, the company must complete the prescribed filings with the Registrar of Companies under the Companies Act, 2013. These obligations are mandatory, and any non-compliance attracts statutory penalties.

For listed companies, all of the above requirements apply, together with additional and more stringent obligations prescribed under the SEBI SBEBS Regulations. The board is required to make annual disclosures of scheme details and any material changes to the stock exchanges. Further, in-principle approval from the relevant stock exchange(s) must be obtained prior to the implementation of any scheme and prior to grant.

Where the incentive plan involves non-resident participants, the issuance of shares is treated as foreign direct investment under the foreign exchange laws governed by the Foreign Exchange Management Act, 1999, and the rules, regulations and master directions framed and issued thereunder by the Central Government and Reserve Bank of India. The company must file Form ESOP with the Reserve Bank of India within 30 days of grant. Upon exercise/allotment, Form FC-GPR must be filed through the FIRMS portal within 30 days. Conversely, where an Indian resident employee receives ESOP benefits from a foreign company, the domestic employer is required to file Form OPI (Part B) on a semi-annual basis through its authorised dealer (AD) bank.

Lastly, tax-related compliances are identical to regular payroll obligations. The employer must withhold the TDS under the Income-tax Act, 1961 at the time of exercise or payout and report the same in Form 16.

Participants in incentive plans do not have a statutory right to compensation for the loss of awards upon termination of employment. The consequences of termination, whether awards lapse, vest, remain exercisable or are forfeited, are determined by the terms of the incentive scheme, subject to limited statutory protections. The reason for termination is critical in determining outcomes. Accordingly, it is advisable to incorporate clear and robust contractual provisions specifying the treatment of incentive entitlements upon termination of employment and defining the relevant termination events for the purposes of these arrangements.

For listed companies, in cases of resignation or termination not involving misconduct, all unvested awards lapse without compensation, while vested awards may be exercised within the post-termination exercise period specified in the scheme. In cases of termination for misconduct, the regulations permit schemes to provide for forfeiture of even vested awards, and this is standard market practice. Mandatory protections apply in limited circumstances. In the case of death of a participant, all awards (vested and unvested) vest immediately in the legal heirs or nominees, and on permanent incapacity, all awards vest immediately in the participant. In the case of retirement or superannuation, unvested awards do not automatically lapse and may continue to vest in accordance with the original vesting schedule, subject to scheme terms.

For unlisted companies, the position is broadly similar. On resignation or termination, unvested awards lapse and vested awards may be exercised within the period prescribed under the scheme. Termination for misconduct may result in forfeiture of both vested and unvested awards if the scheme so provides. As with listed companies, statutory protections require immediate vesting of all awards on death or permanent incapacity, but there is no statutory carve-out for retirement or superannuation, which remains entirely plan-driven.

In the case of cash-based incentive arrangements, including deferred bonuses and cash-settled long-term incentive plans, there is no statutory entitlement to compensation in respect of unvested or forfeited amounts. Such arrangements are purely contractual in nature, and the application of forfeiture or clawback provisions is addressed in response 8 above.

India does not have sector-specific data protection legislation governing incentive plans. In practice, organisations continue to align their data processing activities with the applicable data protection framework, under which employers are permitted to process employee data, with prior intimation, for purposes arising out of the employer–employee relationship, including the grant and administration of incentive arrangements.

In relation to cross-border data transfers, Indian data protection laws permit the transfer of personal data outside India, provided that the recipient ensures a level of data protection comparable to that required under Indian law. As a matter of good governance and risk management, organisations commonly implement contractual safeguards in this regard.

Separately, the Government of India has notified the Digital Personal Data Protection Act, 2023 and the rules made thereunder (“DPDP Framework”), although several operative obligations are yet to be brought into force. The DPDP framework mandates explicit consent for the processing and transfer of personal data, together with detailed notice requirements specifying the purpose of such processing. Where incentive plans involve foreign entities, such as global parent companies or international payroll administrators, cross-border transfers of personal data are permitted under the DPDP framework, provided that the recipient country is not restricted by the Central Government and explicit employee consent is obtained prior to such transfer to third parties such as employee benefits trust.

For unlisted companies, incentive plans are governed by the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014. The framework requires shareholder approval by special resolution, minimum vesting periods, and detailed disclosures in the explanatory statement, ensuring transparency and preventing misuse.

For listed companies, the primary governance framework is prescribed under the SEBI SBEBS Regulations. These regulations require shareholder approval by special resolution, in-principle approval from stock exchanges prior to implementation of the scheme and grant, prescribed pricing and vesting norms, administration through a compensation committee, and detailed disclosures to shareholders, grantees and stock exchanges. Ongoing compliance includes annual disclosures, reporting of material changes, and certification of compliance by the statutory auditors.

In addition, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 impose overarching governance requirements. These include board approval of remuneration based on recommendations of the nomination and remuneration committee, and detailed remuneration disclosures in annual reports, including pay ratios and performance-linked components.

Companies proposing to list are subject to enhanced governance and disclosure requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”), including detailed disclosure of outstanding incentive plans and potential dilution in the offer documents.

In general, employee incentive plans in India do not require a prospectus under the ICDR Regulations. Grants to employees are expressly excluded from the definition of a public offer and therefore fall outside prospectus obligations under Section 23 of the Companies Act, 2013 read with the ICDR Regulations.

That said, incentive plans do become subject to securities law disclosure requirements where a company is otherwise issuing a prospectus for capital raising. Companies proposing to list are subject to enhanced disclosure requirements under the ICDR Regulations. The draft red herring prospectus must contain detailed disclosures relating to outstanding ESOPs and SARs, including the number of options, exercise price, vesting conditions, dilution impact and accounting treatment.

SEBI has recently issued a consultation paper proposing clarifications on the treatment of ESOPs granted to founders who are later reclassified as promoters at the time of IPO, addressing longstanding ambiguities under the promoter exclusion rule in the SEBI SBEBS Regulations.

Post-listing, listed entities are also subject to ongoing disclosure obligations under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, including disclosure of material changes to incentive schemes or capital structure.

Yes. Specialist regulatory regimes apply to incentive plans in regulated sectors and in cross-border structures.

For cross-border structures, the foreign exchange laws are applicable, as detailed in response 17, 19, and 20.

For Non-Banking Financial Companies, Reserve Bank of India compensation guidelines require applicable NBFCs to adopt a board-approved remuneration policy, constitute a nomination and remuneration committee, and include principles governing fixed and variable pay as well as malus and clawback provisions. The committee is expected to work in coordination with the risk management committee to ensure alignment between remuneration and risk. The structure of variable pay, including the proportion deferred and the deferral period, is left to board determination based on role and risk profile.

For private sector banks, Reserve Bank of India compensation guidelines applicable to whole-time directors, CEOs and material risk takers require that at least 50% of total remuneration be variable (subject to an overall cap of 300% of fixed pay), and mandate deferral of at least 60% of variable pay over a minimum period of 3 years, with such deferred amounts being subject to malus and clawback mechanisms.

For insurance companies, the Insurance Regulatory Development Authority of India’s remuneration guidelines regulate remuneration for non-executive directors and key managerial persons and prohibit non-executive directors from receiving equity-linked benefits. Under the guidelines, ESOPs are included in the computation of total remuneration, and key managerial personnels are not eligible to receive sweat equity. For unlisted insurers, ESOP grants are capped at 1% of paid-up share capital in any year, with an overall limit of 5% of paid-up share capital. The guidelines also require that a portion of variable pay be deferred and that malus and clawback provisions be incorporated into remuneration arrangements, particularly in cases involving misconduct or governance failures.

Equity-based incentive plans offered by offshore entities to employees’ resident in India are regulated under the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Overseas Investment) Regulations, 2022. Such investments are treated as overseas portfolio investment and are permitted up to 10 per cent of the paid-up share capital of the offshore entity. Any remittance towards such investment is required to be made through authorised dealer banks. Under the Liberalised Remittance Scheme prescribed by the Reserve Bank of India, the limit on remittances made by an Indian resident employee towards the acquisition of shares under incentive plans is USD 250,000 per financial year. In addition, the Indian employer is required to submit a semi-annual return in Form OPI to the Reserve Bank of India through its authorised dealer bank.

Conversely, where Indian companies issue equity-based incentive plans to employees’ resident outside India, such issuances are permitted, provided that the company is not engaged in a prohibited sector and the issuance is made under the automatic route. In such cases, the company is required to report the issuance to the Reserve Bank of India through its authorised dealer bank, in the manner and forms referred to in response 11.

The process for granting awards under an employee incentive plan in India differs markedly between share-based plans and purely cash-based incentives. The requirements for companies are governed primarily by the Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014, with additional requirements applicable to listed companies under the SEBI SBEBS Regulations.

Share-Based Incentive Plans: For both unlisted and listed companies, the nomination and remuneration committee or the compensation committee of the board recommends the scheme, including eligibility, quantum, vesting conditions, exercise price formula and any lock-in. The board of directors approves the draft scheme. Thereafter, a special resolution must be passed at a general meeting to approve the scheme.

A separate special resolution is required where: (a) options are proposed to be granted to employees of a subsidiary or holding company, and/or (b) in case of listed companies, the grant to any identified employee exceeds 1% of the issued equity capital (excluding warrants and conversions) in any financial year. The notice of the general meeting must include an explanatory statement containing the prescribed particulars, including total options, class of eligible employees, appraisal process, vesting period (minimum one year), exercise price or formula, and any lock-in. After the shareholders’ approval, Form MGT-14 must be filed by the company with the Registrar of Companies within 30 days of the special resolution.

For listed companies, prior to any grant, in-principle approval must be obtained from the recognised stock exchange(s) where the shares are proposed to be listed. The compensation committee/ nomination and remuneration committee approves the specific grant on the grant date. A formal grant letter is issued to the employee.

The incentive plan should include a minimum vesting period and comply with applicable eligibility criteria.

Post grant of the equity-linked incentives, the company must maintain a register of options in Form SH-6 and comply with accounting standards.

In the case of listed companies, the SEBI SBEBS Regulations require that prescribed disclosures be provided to employees prior to the grant of ESOPs and SARs.

Cash-based incentives, including performance bonuses, variable pay, profit-sharing arrangements and cash-settled stock appreciation rights (where no actual shares are issued), are fundamentally contractual in nature and attract significantly lighter regulatory oversight compared with share-based plans.

The nomination and remuneration committee (where constituted) is required to formulate and recommend to the board of a company, a policy relating to the remuneration of directors, key managerial personnel and other employees. This policy ordinarily covers the framework for variable pay and performance-linked incentives. The board of directors adopts the policy. In the case of listed companies, the policy is also disclosed in the corporate governance report as required under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

An overseas corporation can operate an incentive plan in India without prior approval of the Reserve Bank of India only for employees who are (a) individuals employed as employees or directors of the Indian office/ branch or subsidiary of such offshore entity, or an Indian entity in which such offshore entity holds direct or indirect (through a special purpose vehicle or a step-down subsidiary) equity interests, provided that such individuals fall within definition of ‘employee’ under the applicable Indian governance norms, and (b) the equity-linked incentives are offered by the issuing offshore entity ‘globally on a uniform basis’.

Overseas incentive plans must be aligned with Indian corporate governance norms, under which shares cannot be allotted at a discount except in the case of sweat equities. Accordingly, equity-linked incentive arrangements with a ‘nil’ exercise price, as commonly adopted by certain overseas corporations, may not be permissible under Indian law.

Yes, employees who satisfy the applicable governance norms are eligible to participate in incentive plans of an overseas subsidiary or a foreign group company, subject to compliance with sectoral caps and other requirements under Indian exchange control laws. In cases involving inbound foreign investment by a foreign entity (on behalf of a foreign employee), if such investment is characterised as downstream investment, prior approval of the board of the investing entity, as well as the Indian investee company, would be required.

While Indian exchange control laws do not distinguish between employees and founders, it is recommended that incentive plans strictly adhere to the governance norms prescribed for eligible employees and other qualifying participants.

Further, where an individual resident outside India exercises options that were granted while the individual was a resident in India, the resulting instruments must be held on a non-repatriation basis. In such cases, the Indian entity is required to comply with prescribed reporting requirements, including filing Form ESOP at the time of grant, Forms FC-GPR upon exercise of the options, and FC-TRS in the case of transfer of exercised/allotted shares, along with compliance for annual FLA return filing under Reserve Bank of India norms.

For internationally mobile employees, Indian taxation depends on the individual’s residential status for the relevant financial year. Taxation is typically apportioned based on the number of workdays or the period of services rendered in India, with residence generally determined by the statutory threshold of 182 days in a financial year. Only the portion of the perquisite attributable to services rendered in India during the grant-to-vesting or grant-to-exercise period is taxable in India, even where the option is exercised outside India.

Relief from double taxation is generally available under applicable double taxation avoidance agreements, subject to satisfaction of the relevant treaty conditions. In such cases, foreign tax credits may be claimed by the employee in accordance with
Indian tax law and the relevant treaty provisions.

In practice, employers and employees rely on mobility tracking and detailed service records to substantiate treaty claims and support the classification of income for tax purposes, as these issues are commonly scrutinised in the context of cross-border equity-based incentive plans.

While cash-based incentive structures avoid equity dilution, they often present liquidity and tax inefficiencies, particularly for internationally mobile employees, as the tax liability typically arises at the time of settlement.

The cash payout (representing the appreciation value) is treated as a perquisite and is fully taxable as salary in the hands of the employee at applicable slab rates.In the case of internationally mobile employees, such taxation generally applies where the individual satisfies the minimum residency threshold of 182 days in India and where the entitlement to the incentive is linked to services rendered in India.

Employers are required to withhold tax at source under the Income-tax Act, 1961, to the extent the incentive is attributable to services performed in India. In cross-border scenarios, this may result in double taxation exposure for mobile employees, particularly where corresponding relief under tax treaties or foreign tax credits is not immediately available, thereby making cash-settled incentive plans less attractive for such employees.

Over the past 12 months, incentive plan design in India has shown a clear shift towards stronger performance linkage and higher at-risk pay, driven by market volatility and persistent talent retention pressures. Recent surveys indicate that median compensation for professional (non-promoter) chief executive officers is approximately INR 10 crore, reflecting a 13% year-on-year increase. Fixed pay typically constitutes around 40% of total remuneration, with the remaining 60% structured as at-risk pay, comprising short-term incentives of approximately 25% and long-term incentives of approximately 35%. Long-term incentives now account for roughly 35% of total remuneration for professional chief executive officers, underscoring the increasing emphasis on long-term value creation and alignment with shareholder interests within the framework of managerial remuneration limits and corporate governance norms.

Within equity instruments, restricted stock units are gaining prominence as effective retention tools due to their relative certainty of value, while stock appreciation rights are declining in popularity amid economic uncertainty and valuation volatility. Promoter chief executive officers, in contrast, continue to rely predominantly on fixed pay (often exceeding 50%) or commission-based remuneration, which may be less closely aligned with performance. This divergence raises governance concerns, particularly as promoters are generally ineligible to participate in employee stock option schemes under Section 62(1)(b) of the Companies Act, 2013 owing to their controlling shareholding.

Governance-driven features are becoming more pronounced in incentive structures. There is a discernible trend towards incorporating malus and clawback provisions in executive employment contracts, reflecting heightened expectations around accountability, risk management, and regulatory scrutiny. Concurrently, organisations are moving away from uniform employee stock option plans in favour of more specialised and differentiated incentive arrangements tailored to senior and critical talent.

Alongside equity-based incentives, employers are increasingly deploying non-equity components such as wellness allowances, flexible benefits, and structured upskilling programmes to strengthen employee engagement and retention.

The Labour Codes further impose obligations relating to equitable wages, minimum wage compliance for contract workers, and social security portability, while also extending protections to gig and platform workers. These developments have intensified scrutiny by nomination and remuneration committees, particularly in relation to key managerial personnel pay ratios and alignment with broader workforce protections. As a result, committees are required to exercise enhanced oversight to balance talent retention strategies with statutory and governance imperatives.

From a securities law perspective, recent amendments issued by the SEBI, including the insertion of Regulation 9A in September 2025 and valuation-related amendments in December 2025, have clarified the eligibility of founders and promoters for pre–initial public offering equity grants, subject to a minimum one-year prior association requirement. While these amendments are expected to benefit startups, they simultaneously reinforce stringent governance and disclosure norms applicable to the issuance of sweat equity and employee share-based benefits more broadly.

Additionally, from a taxation perspective, amendments and developments to the tax regime are typically introduced through the annual union budget presented by the Parliament of India and may impact the tax deferral or relief available for equity-linked incentive schemes, as well as the taxation of cash-based incentive schemes.