Understand how ESOP financing can fund exercise costs and tax liabilities, enabling employees to convert vested options into equity and plan for long-term wealth creation.
Last updated on: February 18, 2026
ESOP financing typically provides employees with a loan to cover the ESOP exercise price and related tax obligations, allowing early conversion of vested options without tapping personal savings. Lenders often take a pledge on the shares and structure repayment to match a future liquidity event. It can be an IPO, buyback or secondary sale, which can reduce monthly cashflow pressure. This option may help employees access the benefits of ESOP ownership while managing tax timing and liquidity risk.
Here are the key details of ESOP financing options available on Bajaj Markets:
| Partner | Minimum Loan Amount | Maximum Loan Amount | Starting Interest Rate |
|---|---|---|---|
ESOPPDHAN |
₹1 Lakh |
₹10 Crores (capped at 35% of FMV) |
9% p.a. |
Disclaimer: The details mentioned above are subject to change at the lender’s discretion.
Employee stock plans can be funded in different ways to suit company goals and participant needs. Common ESOP financing models include:
External debt is raised to buy company shares, which are then held in trust and allocated to employees over time. This model is typically used when immediate share purchase is required.
The company directly contributes cash or its own shares to the plan, avoiding external borrowing while still allocating ownership to employees.
This blends direct company contributions with borrowed funds. It can provide flexibility to scale allocations while managing cash flow.
A mixed approach where cash and share contributions are used together, allowing custom allocation rules and funding arrangements under the ESOP structure.
Existing owners sell shares to the ESOP and finance the sale themselves, often receiving repayments from company cash flow or future liquidity outcomes.
ESOP financing solutions are designed to make option exercise practical and to align employee interests with company growth. Typical features and benefits include:
Loans or advances can cover both the exercise price and likely tax liabilities, reducing the need for personal cash.
Many ESOP loan structures focus security on the underlying shares rather than personal assets, which could lower personal financial risk.
Repayment might be structured as a bullet payment on an exit or buyback, which helps preserve employee cash flow.
Financing is often available for a percentage of the shares’ fair market value, enabling selective exercise of vested options.
By enabling employees to convert options into ownership, ESOP funding may support retention and align incentives.
Interest rate and term can be tailored based on company valuation, credit risk and expected time to liquidity.
Eligibility for ESOP funding is generally tied to the ESOP grant and the company’s policies. Common criteria include:
Applicants usually need vested options that are exercisable under the company’s stock plan.
Lenders often look for a minimum service or vesting period to assess continuity and risk.
The employer’s ESOP plan must permit exercise, share pledge and any third-party financing arrangements.
Providers usually evaluate company valuation, expected liquidity timeline and borrower profile before approving ESOP financing.
Grant letters, vesting schedules, identity proof and salary/employment verification are typically required.
Employees who exercise and later sell ESOP shares usually face two distinct tax events: a tax on the benefit at exercise and a capital-gains tax on the eventual sale. The quantum and classification of tax depend on the timing of exercise and sale, the fair market value used, and prevailing tax rates including any surcharge and cess.
At exercise, the difference between the Fair Market Value (FMV) of the shares on the date of exercise and the option exercise price is generally treated as a taxable perquisite and taxed as ordinary income at your marginal tax rate. In practice, companies or lenders who fund exercise often treat this amount as the immediate tax liability that the employee must account for.
When you sell the shares later, the gain over the FMV at the time of exercise is normally taxed as capital gains. If the sale happens after a longer holding period and the shares are listed, the gain could attract long-term capital gains (LTCG) rates; if sold sooner, short-term capital gains (STCG) rates may apply. In ESOP examples, capital gains rates used often include surcharge and cess, so the effective rate could be different from the headline rate.
Exercising early can sometimes reduce your overall tax because the perquisite taxed at exercise is calculated on a lower FMV at vesting. However, if you wait until near a listing the FMV and the taxable perquisite could be much higher. Early exercise may also start the holding period sooner, which could help qualify gains as long-term later. These effects depend on future company growth and applicable tax rules, so outcomes may vary.
Here is a working example to illustrate how exercise and sale taxes might be computed. Note that the values are illustrative and include effective tax rates with surcharge and cess.
Hence, total tax (If exercised at vesting and sold at listing)
= Tax at exercise + Capital gains tax
= ₹4,68,000 + ₹20,18,250
= ₹24,86,250.
Now, consider the opposite:
Note: These figures are illustrative. Actual tax liability could differ based on your marginal tax slab, applicable surcharges/cess, the tax treatment of pre-listing vs post-listing gains, and any future tax law changes. Always consider consulting a tax professional for personal tax planning.
Applying for an ESOP loan is usually a digital, document-driven process that aims for clarity and speed. Here are steps to apply for an ESOP loan on Bajaj Markets:
The loan amount is disbursed after successful verification and completion of documentation.
Reviewer
The loan sizes for ESOP financing usually vary widely, from a few lakhs to several crores depending on the lender and deal. Some providers advertise very large limits for corporate transactions, while others focus on individual employee loans.
ESOP financing typically advances funds to cover exercise price and tax costs, secured by a pledge of the underlying shares. Repayment is often linked to a liquidity event, such as an IPO, buyback or secondary sale.
Small businesses may be able to use ESOP funding, but the availability usually depends on company size, valuation clarity and exit prospects. Lenders commonly underwrite on a case-by-case basis for ESOP funding in India.
Lenders typically set a loan-to-value (LTV) or margin against the fair market value of pledged ESOP shares. Practical LTVs often cover a portion of FMV, commonly in the range cited by specialised providers.
The tenure is usually aligned with the expected liquidity timeline and may range from months to several years. Many ESOP loans are structured with bullet repayment at exit rather than fixed monthly EMIs.
The typical process includes an eligibility check, valuation review, digital KYC, underwriting and sanction followed by documentation and disbursal. Employer verification and plan consent are often required before the funds are released.
The ESOP loan interest rates are generally based on the lender’s cost of funds, borrower risk, company valuation and expected hold period. Final pricing often reflects credit assessment, deal structure and market conditions.
Prepayment is commonly permitted but usually subject to terms in the loan agreement and any applicable charges. Borrowers should check sanction letters for pre-closure fee clauses and applicable processing charges.
If the pledged share value falls, lenders may reassess exposure and could request additional security or restructuring under the agreement. The outcome depends on contract terms and negotiation between borrower and lender.
ESOP financing lets you exercise options while retaining ownership, deferring sale and potential upside. Conversely, selling converts equity to cash immediately but typically ends future upside and may have different tax implications.
Post-resignation exercise rules usually depend on your company’s ESOP plan and vesting schedule; many plans set a post-termination exercise window. Lenders often require clarity on post-resignation terms before approving ESOP lending.
Whether ESOPs are better than getting a higher salary depends on personal goals, liquidity needs and risk appetite; ESOPs could offer long-term upside. Salary raises usually improve immediate cash flow, while ESOP funding may support future wealth creation.