RSU vs ESOP: How to Decide the Right Equity Awards Plan for Your Company

Designing the right equity awards plan in India is one of the most critical decisions for founders, HR leaders, and CFOs.

Should you rely on Employee Stock Options (ESOPs), the popular choice for early-stage startups, or shift to Restricted Stock Units (RSUs), which provide employees with more certainty but create added complexity in payroll and compliance?

The choice between RSU vs ESOP shapes how your cap table evolves, how expenses are recognised in your P&L under IFRS-2, the cash your payroll team must set aside for tax withholding, and even how quickly candidates accept offers.

This guide compares RSUs and ESOPs for Indian companies from an employer’s perspective. By the end, you will have a decision framework, compliance checklist, and communication playbook to design your equity plan with confidence.

What is an ESOP?

An Employee Stock Option Plan gives employees the right to buy shares at a fixed exercise price after the award vests. Employees gain only if the FMV (Fair Market Value) is above the exercise price when they choose to exercise.

How ESOPs work:

• Lifecycle: grant, vest, employee exercise, sale or liquidity event.
  
• Vesting: typically a 1-year cliff, then monthly or quarterly vesting over the remaining period. Vesting can also be tied to personal/company milestones. Vesting itself does not create a tax event for the employee.
  
• Company obligations: create and maintain an ESOP pool, issue grants and agreements, track vesting and exercises, and plan for exits such as buybacks, secondary sales, or IPO.

What is an RSU?

Restricted Stock Units are a promise to deliver actual shares once vesting conditions are met. There is no purchase price for the employee.

How RSUs work:

• Lifecycle: grant, vest, share delivery and payroll withholding, later sale by the employee.
  
• Vesting: often time-based with a 1-year cliff, then quarterly or monthly,but it can also be structured around performance milestones.
• ‍Company obligations: compute the perquisite value on vesting, deduct and deposit TDS in cash under Section 192, fund TDS via salary deduction, employee prepayment, net share settlement or sell to cover, then deliver the shares and update payroll and the cap table.

How to decide: RSU vs ESOP for Indian companies

1. Stage of company

a. Early-stage startups: ESOPs fit better

At this stage, ESOPs are more practical because employees only “buy in” if the company grows in value. If the company does not, the options simply lapse. This helps keep dilution lower in practice and avoids employees facing tax liability when there is no liquidity event.

RSUs, by contrast, automatically deliver shares on vesting and trigger immediate tax. Without an IPO or buyback in sight, employees could be left with a tax bill they cannot fund. That is why most early-stage founders avoid RSUs.

b. Growth-stage: A hybrid approach

By this point, companies compete for senior hires who want equity to feel like guaranteed compensation. RSUs work well here because they remove the step of paying to exercise.

At the same time, ESOPs remain effective for the broader team since they scale better and do not saddle the company with ongoing tax-withholding obligations for every vesting event.

c. Late-stage and pre-IPO: RSUs take over

Closer to IPO or once listed, employees, especially senior leaders, expect equity as guaranteed pay. RSUs meet this expectation because shares are delivered automatically on vesting, and liquidity is usually available through IPO, buyback, or open market sale. Companies at this stage also have the financial systems to manage the tax obligations that come with RSUs.

ESOPs may still run in parallel for junior or mid-level staff, but RSUs typically become the primary tool for leadership and high-value roles.

2. Accounting impact

ESOPs are valued using models (like Black-Scholes) that discount for volatility and vesting risk. This often produces a lower fair value than the market price of actual shares, meaning the reported expense is lighter. 

RSUs must be expensed at full FMV on the grant date, spread over vesting. This looks heavier on the P&L.

3. RSU vs ESOP tax treatment

ESOP taxation

At exercise: At this point, the employees pay the strike price, and the difference between that and the FMV is taxed as salary. 

At sale: Capital gains tax applies later when the shares are sold. For unlisted shares, gains on holdings under 24 months are short-term (taxed at slab rate) and over 24 months are long-term (12.5% flat since Budget 2024, without indexation). For listed shares, the holding period is 12 months for long-term classification.

Because exercise is voluntary, employees often delay it until a liquidity event, which means they can use sale proceeds to cover tax. This flexibility helps avoid situations where they owe tax without liquidity.

RSU taxation

At vesting: The FMV on the vesting date is taxed as salary income. The employer must deduct and deposit TDS at this point.

At sale: Any further appreciation is taxed as capital gains, with the holding period starting from the vesting date. The same long-term vs short-term rules apply as above.

Read more about equity awards taxation.

4. Treasury and cash planning

With ESOPs, the company does not face any cash obligation when options are granted or when they vest. The only time cash outflow arises is if the company later decides to run a buyback to give employees liquidity. 

With RSUs, the company has to deal with cash outflows on every vesting date. Even though the tax is the employee’s liability, the employer must deduct TDS on the value of vested shares and deposit that amount with the tax authorities in cash. 

To manage this, companies often use mechanisms like sell-to-cover in listed companies (selling some shares to fund the tax) or net settlement (delivering fewer shares so the withheld portion covers tax). 

This makes RSUs a recurring treasury and payroll exercise.

5. RSU vs ESOP compliance in India

ESOP compliance

Private companies: To establish an ESOP plan, obtain board approval and a shareholder special resolution under the Companies Act, 2013, Section 62(1)(b) read with Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.

Public listed companies: Comply with the SEBI (SBEB & SE) Regulations, 2021 in addition to the Companies Act, including board and shareholder special resolution, prescribed scheme disclosures, compensation committee oversight, and ongoing exchange filings.

RSU compliance

Private companies: RSUs are not separately defined under the Companies Act. If equity-settled with new share issuance, obtain board approval and a shareholder special resolution under Section 62(1)(c) (preferential allotment) and comply with Section 42 (private placement). If cash-settled or settled from existing shares, follow a board-approved policy without triggering a new share issue route.

Public listed companies: RSUs must comply with the SEBI (SBEB & SE) Regulations, 2021 in addition to the Companies Act, including shareholder approval and scheme disclosures, and adherence to the SEBI PIT (Prohibition of Insider Trading) code.

RSU vs ESOP: How employee perception, roles, and market conditions shape the choice

1. Employee psychology

Employees interpret ESOPs and RSUs very differently.

With ESOPs, even though the strike price in India is usually just face value, the real cost arises from tax at the time of exercise. Because liquidity is uncertain, employees often delay exercising. If their options expire before a liquidity event, they lose the benefit entirely. This makes ESOPs feel risky: highly valuable if timing works out, but uncertain if it does not.

With RSUs, shares are delivered automatically on vesting. There is no strike price and no exercise decision. To employees, this feels more tangible and predictable, closer to guaranteed pay, even though in India tax is still due at vesting whether or not liquidity exists.

2. Role level

Executives and niche hires generally prefer RSUs, since they resemble guaranteed pay and align with compensation structures at larger organisations. Offering RSUs at this level can help close critical talent without over-reliance on cash. For the wider employee base, ESOPs are more sustainable.

3. Market conditions

Market cycles affect how employees perceive value. 

In rising markets, ESOPs are motivating because employees can clearly see the upside between their strike price and the company’s FMV. This creates strong retention as employees stay invested in the company’s success. In flat or volatile markets, however, ESOPs lose appeal. Employees hesitate to exercise for fear of paying tax on illiquid shares. 

RSUs help in these situations by removing the exercise decision. Employees know they will receive shares automatically if they stay, which provides reassurance. For founders, RSUs can be especially useful in downturns or uncertain valuations when hiring or retaining senior talent.

Conclusion

There is no universal winner between ESOPs and RSUs. 

ESOPs remain the best tool for early-stage startups looking to build an ownership culture without triggering payroll complexity. RSUs, on the other hand, are invaluable for later-stage companies and senior hires who expect equity to feel like part of their guaranteed pay.

FAQs

1. Is RSU part of CTC?

Yes, in India RSUs are usually included in the Cost to Company (CTC). Employers present the FMV (fair market value) of RSU grants, spread over the vesting period, as part of the employee’s total compensation. However, the employee only actually receives value when the RSUs vest.

2. What is the difference between RSU and Employee Stock Ownership Plan (ESOP)?

The key difference is how employees get shares:

• RSUs are promises to deliver actual shares once vesting conditions are met. Employees do not pay anything to receive them, but they are taxed as salary at vesting.
  
• ESOPs give employees the right to buy shares at a fixed exercise price after vesting. Employees benefit only if the market value of the shares is higher than the exercise price, and they choose when to exercise.

3. How are RSUs taxed in India??

RSUs are taxed in two stages:

At vesting: The FMV (fair market value) of shares on the vesting date is treated as salary income. The employer must deduct and deposit TDS at this point, even if the shares cannot be sold immediately.

At sale: Any further appreciation since vesting is taxed as capital gains. The holding period starts from the vesting date. For listed shares, more than 12 months is long-term (12.5% tax on gains above ₹1.25 lakh). For unlisted shares, more than 24 months is long-term (12.5% flat since Budget 2024, without indexation).