A growth-stage startup along OMR had issued ESOPs to its early engineering hires two years earlier, as most startups here do to compete for talent without matching a larger company's cash salary. When the first batch of options came up for exercise, the payroll process had no mechanism in place to actually handle the tax event that triggers.
Perquisite tax applies at exercise, not at grant
Employees don't owe tax when ESOPs are granted — the tax event happens at exercise, calculated on the difference between the exercise price and the fair market value of the shares at that time. This needs to run through payroll as a perquisite, with the correct TDS deducted, in the same cycle the exercise happens — not retroactively once someone notices it was missed.
Why OMR startups specifically run into this gap
OMR's concentration of funded startups means ESOP grants happen early and often, frequently before a company has scaled its finance function enough to have a payroll process built for handling exercises correctly. The gap isn't a lack of awareness that ESOPs have tax implications generally — it's that nobody set up the specific payroll workflow for when the first exercise actually happens.
Coordinating valuation and payroll timing
Getting the fair market value at the exercise date requires coordination with whoever handles your company's valuation, and that figure needs to reach payroll before the exercise is processed, not after — a timing dependency that's easy to overlook until the first exercise is already underway.
If your OMR startup is approaching its first ESOP exercise cycle and payroll isn't set up for it yet, C S Rushil & Co. can get this in place before it becomes urgent. Book a free consultation.