The short answer: gains from employee stock options and share awards are taxed as employment income in Singapore — not as capital gains — and the tax point falls when the option is exercised or the shares vest, not when they are granted. Employers must report these gains to IRAS separately from ordinary salary, and non-citizen employees who leave Singapore while still holding unexercised options face a special “deemed exercise” rule that can trigger tax before any shares actually change hands.
ESOP vs ESOW: two different structures
IRAS separates equity compensation into two categories, and the label a company uses internally matters less than which category its scheme actually falls into.
- Employee Stock Option Plan (ESOP): the employee is granted the right to buy shares at a fixed exercise price, usually after a vesting period. No gain arises until the employee actually exercises the option and pays the exercise price.
- Employee Share Ownership (ESOW) plan: a broader category covering restricted share awards, RSUs, and other arrangements where shares (or a right to shares) are given outright, often subject to a vesting or moratorium period before the employee has free use of them.
The distinction drives everything downstream — when tax is triggered, how the gain is calculated, and what the company must report.
When is the gain taxed?
Neither ESOP nor ESOW gains are taxed at the point of grant. The taxable event is later:
- For ESOP, tax is triggered when the employee exercises the option — i.e. pays the exercise price and takes up the shares.
- For ESOW, tax is triggered when any vesting or moratorium (selling) restriction lifts and the employee obtains full ownership of the shares.
This matters for cash-flow planning: an employee can owe tax on paper gains in a private company whose shares they cannot yet sell. The tax deferment scheme discussed below exists precisely to address this mismatch.
How the taxable gain is calculated
The taxable gain is the difference between the open market value of the shares at the tax point and what the employee paid for them:
- ESOP: open market price at exercise minus the exercise price paid.
- ESOW: open market price when the vesting or moratorium period ends minus the price paid (which may be nil for an outright share award).
For an unlisted company, “open market value” is not a quoted share price — it requires a defensible valuation, typically drawn from the company’s most recent funding round or an independent valuation exercise. Employers should keep this valuation evidence on file, as IRAS can query the basis used.
The resulting gain is taxed at the employee’s personal income tax rates as part of their total employment income for the year — there is no separate, lower rate for equity gains, and no broad capital gains exemption, because the gain arises from employment rather than from an investment disposal.
Are CPF contributions payable?
Generally, no. Provided the scheme is settled in actual shares, ESOP and ESOW gains are not treated as “wages” for CPF purposes, so no employer or employee CPF contribution arises — even though the same gain is fully taxable as income. This is a useful distinction for founders comparing the all-in cost of equity compensation against a cash bonus of equivalent value.
The exception: if the scheme gives the employee the option to receive a cash payout instead of shares, and the employee elects for cash, CPF contributions do become payable on that cash amount, just as they would on a bonus.
Employer reporting: IR8A and Appendix 8B
Gains from ESOP and ESOW plans cannot simply be folded into the salary figure on Form IR8A. Employers must additionally complete Appendix 8B, which sets out the grant date, exercise or vesting date, number of shares, exercise price and open market value used to compute each employee’s taxable gain.
This filing obligation applies for every employee who derived a taxable gain during the year — including employees who have since left the company. Most employers filing IR8A through the Auto-Inclusion Scheme (AIS) submit Appendix 8B data through the same electronic channel, on the same 1 March deadline as the rest of the annual employment income return.
The deemed exercise rule for departing staff
This is the rule that catches founders off guard most often. It applies to non-Singapore-citizen employees, including Singapore Permanent Residents, who:
- cease employment in Singapore,
- leave Singapore permanently, or
- are posted to work overseas, or leave Singapore for more than three months.
For these employees, any unexercised ESOP or unvested ESOW they still hold is treated as if it were exercised or vested one month before their departure — even though no shares have actually changed hands and the underlying options may not even be exercisable yet. The deemed gain is based on the open market value at that point less the exercise price or amount paid.
Because this gain is captured through the employer’s tax clearance filing (Form IR21), companies must identify affected employees, value the unexercised equity, and factor the resulting tax into the clearance process before the employee’s final pay can be released. Missing this step is one of the most common tax clearance errors for companies with foreign staff holding equity.
The tracking option alternative
Because deemed exercise taxes a gain the employee has not actually realised — and may never realise, if the shares later fall in value or the company fails — IRAS allows qualifying employers to apply for the Tracking Option instead. Under this alternative, the employer tracks the ESOP or ESOW through to actual exercise or vesting and reports the real gain when it arises, rather than a deemed gain at departure.
The Tracking Option requires the employer to meet specific qualifying conditions and to apply to IRAS in advance — it is not automatic. Companies that expect to grant equity to a mobile, internationally-based workforce should consider applying for this option as part of setting up their scheme, rather than dealing with deemed exercise calculations reactively each time someone leaves.
Tax deferment for illiquid shares
An employee can owe substantial tax on an ESOP or ESOW gain while holding shares in a private company with no ready market to sell into. To address this, IRAS operates a tax deferment scheme that allows eligible employees to defer payment of the tax attributable to their share gains for up to five years, with interest chargeable on the deferred amount.
The deferral ends early — with tax and interest falling due immediately — on events such as the employee leaving Singapore employment, being posted overseas for an extended period, becoming bankrupt, or passing away. Late payment after the deferral period attracts an additional penalty. This is a useful tool for genuinely illiquid holdings, but it needs to be applied for and is not a default treatment.
What happened to the ERIS exemption
Founders who researched this topic some years ago may recall the Equity Remuneration Incentive Scheme (ERIS), which exempted a portion of ESOP and ESOW gains for employees of qualifying start-ups and SMEs. ERIS has been phased out and no longer applies to gains from Year of Assessment 2025 onward. There is currently no equivalent partial exemption in its place — equity gains granted today are taxed in full as ordinary employment income, subject only to the general reliefs available to any taxpayer.
This makes it more important, not less, to model the after-tax value of an equity grant carefully when using it to negotiate compensation with a prospective hire — the headline number and the employee’s actual take-home gain can differ significantly once exercise-date tax is factored in.
The bottom line
Equity compensation is a powerful tool for cash-constrained start-ups, but it comes with a tax and reporting framework that runs on its own timeline, separate from payroll. The gain is untaxed at grant, taxed at exercise or vesting, spared from CPF in most cases, and subject to a specific — and easy to miss — acceleration rule the moment a non-citizen equity holder heads for the door. None of this is a reason to avoid equity compensation; it is a reason to get the scheme rules, valuation approach, and reporting process right from the first grant.
To learn more about how we support founders on compensation structuring and IRAS reporting, see our services. You may also find our article on hiring your first employee in Singapore a useful companion read.