ESOPs vs Unlisted Shares: What's the Difference and Which is Better for You?

Reviewed by Kanishk Dev Bangia | NISM Series XV Certified Research Analyst

Last Updated: May 2026 | Reg. No: NISM-202300182946

Two employees join a startup in 2023. One gets ₹15 lakh in ESOPs as part of her offer. The other puts ₹15 lakh of her savings into the same company's unlisted shares through a secondary market platform. Three years later, the company files for IPO. On paper, both hold roughly the same equity exposure. In their tax brackets, in their lock-in calendars, in their liquidity options — they're in completely different worlds.

ESOPs (Employee Stock Option Plans) and unlisted shares look similar — both give you equity in a private company — but the tax treatment, holding requirements, and exit mechanics diverge so much that picking the wrong one for your situation can cost lakhs.

What is an ESOP and How Does It Work?

An Employee Stock Option Plan grants employees the right (not the obligation) to acquire company shares at a fixed exercise price after they meet vesting conditions, typically 1–4 years of tenure. The employer-set exercise price is often nominal (₹1, ₹10, or face value) — meaningfully lower than the company's fair market value (FMV).

Three timelines matter: grant date (when the option is issued), vesting date (when you earn the right to exercise — usually staggered 25% per year over four years with a 1-year cliff), and exercise date (when you actually convert the option into a share by paying the exercise price).

You don't pay tax at grant or vesting. You pay tax when you exercise — and again when you dispose of the shares. That's the two-stage taxation framework all Indian ESOP holders work within.

What are Unlisted Shares?

Unlisted shares are equity shares in a company that has not yet listed on a stock exchange. You purchase them directly — through secondary market platforms like UnlistedZone, Stockify, Planify, or Altius Investech — at a price negotiated between the two parties.

Common pre-IPO names that trade in this market include NSE, Tata Capital, OYO, Reliance Retail, Hero FinCorp, and PharmEasy.

Anyone with a demat account and KYC can purchase unlisted shares. You don't need to be an employee, anchor investor, or institutional buyer. You just need capital and willingness to lock it up for 18–36 months on average until liquidity.

How You Acquire Each

The acquisition story is completely different. ESOPs come to you as compensation — you don't pick them; the employer offers them. Unlisted shares require you to go and find them — research, identify the company, find a seller, agree on price, transfer demat.

This matters because ESOPs are tied to your employment relationship. Leave the company before vesting and you forfeit unvested options. Resign after vesting but before liquidity (IPO or buyback) and most companies' plans require you to exercise within 60–90 days or lose the option entirely. Many employees who quit pre-IPO startups have surrendered ESOPs worth crores because they couldn't afford the exercise price within the 90-day window.

Unlisted shares have no employment dependency. Once you own them, they're yours until you choose to transfer them (subject to lock-in if the company files for IPO).

Tax Treatment — Where the Two Really Diverge

This is the section most people skip and later regret. Indian tax law treats ESOPs and unlisted shares very differently at acquisition, and similarly at sale.

At acquisition — ESOPs trigger a tax event, unlisted shares don't.

When you exercise ESOPs, the difference between the share's Fair Market Value on the exercise date and the exercise price you paid is treated as a perquisite — added to your salary income and taxed at your slab rate. So if you exercise 1,000 ESOPs at ₹10 each when the FMV is ₹500, your perquisite is (500 − 10) × 1,000 = ₹4.9 lakh, added to your salary for that financial year. If you're in the 30% slab, that's ₹1.47 lakh of tax you pay even thoughyou haven't sold a single share.

For eligible startups (DPIIT-recognized), the perquisite tax can be deferred — under Section 392(3) read with Section 289(3) of the Income-tax Act 2025, the deferral window is 60 months from the end of the tax year of allotment for shares allotted on or after 1 April 2026, or until you sell, or until you cease employment, whichever is earliest. For non-startup companies, no deferral — you pay perquisite tax in the year of exercise even if liquidity is years away.

Unlisted shares trigger no tax at purchase. You pay full market price, you wait, you pay tax only when you exit.

At sale — both follow the same capital gains rates, but holding-period calculation

Differs.

For unlisted shares: long-term capital gain applies after 24 months of holding (note: not 12 months like listed shares). LTCG is taxed at 12.5% flat without indexation per the Budget 2024 changes that took effect 23 July 2024 (unchanged in Budget 2025 for FY 2025-26).

Short-term capital gain (held <24 months) is taxed at your slab rate.

For ESOPs that remain unlisted (pre-IPO): the 24-month rule applies the same way, and the holding period starts from the exercise date — not the grant or vesting date. So if you exercised in May 2024 and transfer in June 2026, you've held 25 months → LTCG 12.5%.

For ESOPs that become listed (post-IPO): the 12-month LTCG rule applies. LTCG is 12.5% flat with a ₹1.25 lakh annual exemption; STCG is 20%.

The cost basis for capital gains is the FMV on exercise date — NOT the exercise price you paid. This matters because the perquisite tax already taxed the FMV-minus-exercise-price portion. The capital gain only counts the further increase after exercise.

Lock-In Periods Compared

If the company stays private, neither has a regulatory lock-in — you can transfer ESOPs (after the employment exercise window) or transfer unlisted shares (subject to company articles) any time.

The moment the company files for IPO, both face SEBI lock-ins under Regulation 17 of the ICDR Regulations 2018, but the categories are different:

• Unlisted shares held by non-promoter pre-issue shareholders: locked for 6 months from the IPO allotment date.

• ESOPs that have been exercised before the IPO: vesting cliff (typically 1 year) plus an IPO-specific additional lock-in disclosed in the offer document — often 6 months to 1 year.

For a deeper breakdown of lock-in mechanics including how the depository enforces nontransferability,see our complete guide on SEBI lock-in rules for unlisted shares 2026.

Liquidity Before IPO

ESOPs are typically illiquid before a liquidity event (IPO, buyback, or acquisition). Most company ESOP plans contractually restrict transfers — vested shares may sit in your demat for years without any way to convert them to cash. Some companies offer occasional internal tender offers or company-led secondary transactions, but these are at the company's Discretion.

Unlisted shares are transferable through the secondary market platforms you bought them on. Liquidity isn't always great (spreads can be 5–15%, and matching buyer-seller can take weeks for less popular names), but it exists. You can rebalance, exit early, or cycle capital if needed.

Risk Profile

ESOPs concentrate two kinds of risk in one place: your career and a meaningful chunk of your net worth in the same company. If the company fails, you lose your job and your equity.

This is the single biggest unmodeled risk in startup compensation packages.

Unlisted shares can be diversified across multiple companies and sectors. The capital risk is the same per company, but the concentration risk is what you choose to make it.

Which is Better — By Scenario

You're an employee at a high-growth pre-IPO startup: ESOPs are usually the right answer if the exercise price is meaningfully below FMV, the company is DPIIT-recognized (for tax deferral), and you can afford the perquisite tax bill at exercise. The discount baked into the exercise price is real value the company gave you that an outside investor can't replicate.

You're an outside investor wanting pre-IPO exposure to a specific company: Unlisted shares are the only path. ESOPs aren't available to you. The trade-off is paying market price (no exercise-price discount) and accepting that the tax clock starts only at sale. You're already at the company AND want more equity beyond ESOPs: Combine both.

Hold the ESOPs you've been granted, and acquire unlisted shares of the same company on the secondary market if you want exposure beyond your grant. Just be aware of the concentration risk you're stacking — career + ESOP + unlisted in one company = three eggs, one basket.

You're considering a non-DPIIT company's ESOPs with high exercise price: Run the

math first. The perquisite tax at exercise on a company that may not IPO for 4+ years can be a meaningful out-of-pocket cost. Sometimes the answer is "don't exercise until liquidity is closer," accepting the risk of forced exercise on resignation.

Frequently Asked Questions

Q : Can I transfer my vested but unexercised ESOPs?

A: Generally no. Unexercised ESOPs are options, not shares — you don't own anything transferable yet. Most company plans don't permit transferring the option itself. You'd need to first exercise (paying the exercise price + perquisite tax) and then transfer the resulting unlisted shares.

Q : What happens to my ESOPs if I leave the company before IPO?

Most plans give you 60–90 days after your last working day to exercise vested options. Unvested options are forfeited entirely. If you can't afford the exercise price within the window, you lose them. This is why ESOPs at companies with very high FMV-to-exercise price gaps are a double-edged sword for employees who may want to leave.

Q : Are unlisted shares riskier than ESOPs?

Per-rupee invested, the risk is the same — both represent equity in the same kind of private company. But ESOPs add career-and-capital concentration risk that unlisted shares don't. Practically, ESOPs are also "free" in the sense that you got them as compensation; unlisted shares cost you the full purchase price up front.

Q : What's the holding period for LTCG on unlisted shares?

24 months from the date of acquisition. After 24 months, LTCG applies at 12.5% flat without indexation. Before 24 months, short-term capital gain applies at your slab rate.

Q : 6UHJDo listed and unlisted shares have the same LTCG rate?

The rate is the same — 12.5% — but the holding period differs. Listed shares qualify for LTCG after 12 months; unlisted shares need 24 months. Listed shares also get the ₹1.25 lakh annual LTCG exemption; unlisted shares do not.

Q : What is the eligible startup ESOP tax deferral?

For DPIIT-recognized startups, employees can defer the perquisite tax payable at exercise until the earliest of: (a) 60 months after the end of the tax year in which shares were allotted (for shares allotted on or after 1 April 2026), (b) the date of sale of the shares, or (c) the date the employee leaves the company. This is under Section 392(3) read with Section 289(3) of the Income-tax Act 2025.

Q : How is the cost basis of ESOPs calculated for capital gains?

The cost basis is the Fair Market Value of the share on the exercise date — not the exercise price. The perquisite tax already taxed the (FMV − exercise price) portion as salary income, so the capital gain only counts the further appreciation after exercise.

Q : Can I purchase unlisted shares of my own employer to get around ESOP restrictions?

Yes, in principle, subject to your employment contract and the company's articles of

association. Many employees do this to add to their ESOP exposure or to acquire equity in companies that don't offer ESOPs at their level. But check your employment agreement for any restrictions on holding employer equity outside the ESOP program.

Disclaimer:

This is written for educational and informational purposes only. Nothing here constitutes investment advice or a recommendation to buy or sell securities. All data is sourced from publicly available information. Investments in securities markets are subject to market risks — please read all offer documents carefully before investing.