AS | Ankit Sarawagi|Founder, CFOmatrix·July 2026·9 min read | Instrument explainer |
- Employees buy, not just wait. An ESPP lets staff purchase real shares through payroll deductions at a discount, rather than holding an option to buy later.
- The discount and lookback are the value. A discount of up to around 15 percent, and a lookback to the lower of two prices, are what make an ESPP attractive.
- India calls it an ESPS. It runs under the SEBI SBEB Regulations for listed companies and the Companies Act framework for unlisted ones, and is most common in listed firms and MNC subsidiaries.
- Two tax points. The discount is a salary perquisite at purchase; the later gain on sale is a capital gain.
- Different job from an ESOP. ESOPs vest over years to retain early talent; ESPPs are a broad-based benefit that needs a liquid, tradable share to make sense.
| up to 15% Typical ESPP discount to market price | Payroll How contributions are collected, month by month | Buy Shares bought now, versus an option to buy later |
| 1. What an ESPP is 2. How an ESPP works 3. The discount and the lookback | 4. The India context (ESPS) 5. How an ESPP is taxed 6. ESPP versus ESOP |
What an ESPP Is
An Employee Stock Purchase Plan (ESPP) is a company-run scheme that lets employees buy the company’s shares, typically by setting aside a slice of each pay cheque, and typically at a price below the market rate. The employee actually pays for the shares and owns them; they are not simply granted a right to buy in future. In India the same instrument is known as an Employee Stock Purchase Scheme (ESPS), and the two terms describe the same idea.
The appeal is straightforward. An employee agrees to have, say, 5 or 10 percent of salary deducted; the company pools those deductions and, at set dates, buys shares on the employee’s behalf at a discount. Because the purchase price is lower than the market price, the employee is effectively in profit the moment the shares land. That built-in discount is the reason an ESPP is treated as a benefit rather than an ordinary market purchase.
How an ESPP Works
Most ESPPs follow the same rhythm: an offering period during which money is collected, and a purchase date on which shares are actually bought. Here is the flow from the employee’s payslip to shares in their account.
A single offering period can contain one purchase date or several. Longer offering periods, for example running many months with periodic purchases, are what make the lookback feature below so valuable. Because the whole thing runs off payroll, an ESPP is administratively light for the employee: enrol once, and the deductions and purchases happen automatically.
The Discount and the Lookback
Two features decide how good an ESPP is. The discount is the reduction on the purchase price, commonly up to about 15 percent. The lookback is an optional feature that sets the reference price against the lower of the price at the start of the offering period and the price on the purchase date, and then applies the discount to that lower figure. When the share price has risen during the period, a lookback plus a discount can produce a saving far larger than the headline discount alone.
- Reference price = purchase date ₹150
- Less 15 percent discount
- Employee pays ₹127.50
- Instant gain: ₹22.50 per share
- Reference price = lower of ₹100 and ₹150
- Less 15 percent discount on ₹100
- Employee pays ₹85
- Instant gain: ₹65 per share
The lookback only helps if the share price actually moves during the offering period, which is why an ESPP needs a liquid, tradable share to be worth running. On an illiquid private share there is no reliable market price to look back to, and no easy way for the employee to sell.
The India Context: Employee Stock Purchase Scheme
In India, the ESPP is recognised as an Employee Stock Purchase Scheme (ESPS). The framework depends on whether the company is listed:
- Listed companies: an ESPS falls under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, which govern how listed companies run employee share-based schemes, including approvals, disclosures and administration.
- Unlisted companies: employee share schemes run under Section 62(1)(b) of the Companies Act 2013 and Rule 12, the same base provisions used for ESOPs, with a board resolution and a shareholders’ resolution (special or ordinary as applicable) authorising the scheme.
In practice, a broad, discounted, payroll-funded ESPP is most common in listed Indian companies and in the Indian arms of multinationals, where employees buy the foreign parent’s listed shares at a discount. Early-stage private startups almost always reach for an ESOP instead, because their shares are illiquid and an option that vests over time is a better retention tool than a scheme to buy shares the employee cannot easily sell.
If you run an Indian subsidiary of an overseas parent, the ESPP your team joins is usually the parent’s plan, denominated in the parent’s currency and governed by the parent’s rules. Keep clear records of purchase dates, prices and the local perquisite tax, because those become the employee’s cost base and reporting basis later.
How an ESPP Is Taxed
An ESPP is taxed in two stages, and the shape mirrors how employee equity is generally taxed in India.
The employer’s job is to value the perquisite correctly and withhold TDS at purchase, which is very similar to the discipline required when employees exercise ESOPs. For the recipient’s full picture of how employee equity is taxed in India, see our detailed employee ESOP taxation guide.
ESPP Versus ESOP
The two instruments are often confused, but they do different jobs. An ESOP grants an option, a right to buy a set number of shares in future at a fixed exercise price, earned through vesting, with no money paid until the employee chooses to exercise. An ESPP lets the employee buy shares now, at a discount, with their own payroll money, and with little or no vesting.
| Feature | ESPP (Purchase Scheme) | ESOP (Option Plan) |
| What the employee gets | Shares bought now at a discount | A right to buy shares later |
| Who pays | Employee, via payroll deductions | Employee pays only if and when they exercise |
| Vesting | Little or none | Typically four years with a one-year cliff |
| Main appeal | Discount, and lookback where offered | Upside on a fixed strike as value grows |
| Best fit | Listed companies and MNC subsidiaries | Early-stage and growth startups |
| Needs liquid shares | Yes, to be worthwhile | No, upside can wait for an exit |
“An ESOP is a bet on the future you hand to your team; an ESPP is a discount on the present. Startups almost always want the first, because their shares are not yet liquid enough for the second to mean much.”
Ankit Sarawagi, CFOmatrixIf you are a private startup deciding how to share ownership, the ESOP is almost certainly your instrument, and the real work is administering it well: sizing the pool, designing vesting, valuing the shares, and keeping a clean register. That company-side discipline is the subject of our ESOP administration guide, and it is exactly what the free ESOP Flow tool is built to run.
Frequently Asked Questions
What is an ESPP?
An ESPP, or Employee Stock Purchase Plan, is a scheme under which employees buy their employer’s shares, usually funded through regular payroll deductions and usually at a discount to the market price. In India the same idea is called an Employee Stock Purchase Scheme (ESPS). Unlike an ESOP, an ESPP is not a right to buy in future at a fixed strike; the employee actually pays for and receives shares at set intervals. It is most common in listed companies and in the Indian arms of multinationals, where staff can buy the parent’s shares at a discount.
How does an ESPP work?
The employee enrols and chooses a contribution, typically a percentage of salary. Over an offering period the company deducts that amount from payroll each month and holds it. At the end of the purchase period the pooled money automatically buys company shares at a discount to the market price. The shares are then credited to the employee. Many plans run rolling offering periods, so an employee can re-enrol and keep buying at each purchase date.
What are the ESPP discount and lookback?
The discount is the reduction on the purchase price, commonly up to about 15 percent below market. The lookback is a feature in some plans that sets the price against the lower of the share price at the start of the offering period and the price on the purchase date, then applies the discount to that lower figure. A lookback with a discount can make the effective saving much larger than the headline discount when the share price has risen during the period.
Is an ESPP available in India?
Yes, as an Employee Stock Purchase Scheme (ESPS). For listed companies it sits under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, and for unlisted companies employee share schemes run under Section 62(1)(b) of the Companies Act 2013 and Rule 12. In practice a broad, discounted, payroll-funded ESPP is most common in listed Indian companies and in Indian subsidiaries of multinationals, where employees buy the foreign parent’s shares. Early-stage private startups usually use ESOPs rather than an ESPP.
How is an ESPP taxed in India?
Broadly there are two stages. At purchase, the difference between the fair market value of the shares and the price the employee actually pays is a perquisite taxed as salary income, and the employer withholds TDS. Later, when the employee sells the shares, the gain over the value already taxed as a perquisite is a capital gain, short or long term by holding period. For shares of a foreign parent, the employee also has to report the foreign holding in their return. Treat this as the general position and confirm specifics with a tax adviser.
What is the difference between an ESPP and an ESOP?
An ESOP grants an option: a right to buy a set number of shares in future at a fixed exercise price, earned through vesting over several years, with no money paid until the employee chooses to exercise. An ESPP lets the employee buy shares now, at a discount, using their own money collected through payroll, with little or no vesting. ESOPs are the standard startup retention tool; ESPPs are a broad-based benefit more suited to listed companies and MNCs with a liquid, tradable share.
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This is general educational information for founders, current to mid-2026, and is not legal, tax or investment advice. It references the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations and Section 62(1)(b) and Rule 12 of the Companies Act 2013 as generally understood; scheme terms, listed and unlisted requirements, and the tax treatment of perquisites and capital gains vary by company and change over time. Verify the current position and confirm your specific requirements with your company secretary, auditor and tax adviser before acting.
AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix helps founders choose and administer the right employee-equity instrument, from ESOPs to purchase schemes, and run them the right way through valuation, accounting, tax and a clean register. This explainer is part of our company-side ESOP administration series and the free ESOP Flow tool. |