Section 102: capital track vs. income track – a practical comparison.

Equity & Employment · August 12, 2026 · 6 min read

The short answer

Under the trustee capital track, the appreciation is taxed to the employee as a capital gain – 25% – provided the options are held by a trustee for at least 24 months from grant. The price: the company generally forgoes a tax deduction. Under the income track the employee pays full marginal rates – but the company generally gets the deduction. For tech employees, the spread between 25% and marginal rates of up to about 50% usually decides it.

The comparison

Topic	Capital track (trustee)	Income track
Employee tax	25% capital gain on appreciation	Marginal rates + social security
Timing	On actual sale/exercise event (not vesting)	Per the track's rules and grant structure
Company deduction	Generally none	Generally yes
Holding period	24 months with the trustee, from grant	12 months with a trustee, if a trustee track is elected
Fits	Employees and office holders (not controlling shareholders)	Cases where the deduction is worth more than the employee benefit

What it takes for the capital track to hold

• An approved plan and trustee: the plan and trustee must be filed with the assessing officer – since 1 January 2025 through an online system with a detailed questionnaire, per the amendment to the Income Tax Rules (Tax Reliefs on Allotment of Shares to Employees) – and the first grant may only be made 30 days after filing. If the assessing officer does not respond within 90 days, the plan is deemed approved.
• The election is plan-wide: one track for all grants under the plan, with time-bound limits on switching. You cannot tailor a track per employee.
• Grants must actually reach the trustee: grant letters and resolutions must be deposited on time. Grants that sat "in a drawer" at the company are the classic due-diligence finding – and can forfeit the track.
• A sale before the 24 months are up is taxed as employment income. The company and trustee track the clock; the employee pays for a miss.

Who Section 102 does not cover

• Controlling shareholders (approximately: 10%-or-more holders, per the Ordinance's definition) – outside the section.
• Advisers, freelancers and service providers – their grants fall under Section 3(i), on different and less favourable tax terms. Classify correctly up front: an "employee" for 102 purposes is an employee or office holder, not everyone who works with the company.

Why the question comes up too late

Because nobody feels the tax on grant day – it arrives at exercise, years later. The moment a company discovers the plan was never filed, a grant never reached the trustee, or an adviser was granted options "like an employee" is almost always an exit or a financing round, when the stakes are highest and time is shortest. A tidy option plan is cheap now and very expensive retroactively.

Frequently asked questions

What happens when an employee leaves?

Vested options remain subject to the track and the holding period; unvested ones lapse per the plan. The post-termination exercise window is contractual – set it deliberately, not by default.

Can RSUs be granted under 102?

Yes – restricted share units can be granted under the same tracks, with the same holding and tax principles. Choosing between options and RSUs is a question of company stage and pricing, not of track.

See also: When a SAFE is the right instrument – and when it isn't; The founders' agreement – five clauses every agreement needs.

For BusinessEquity & Employment→

The above is general information only, current as of the date of publication, and does not constitute legal advice or a substitute for advice on your specific circumstances. Consult a lawyer before acting.

← All corporate and hi-tech articles