Employee Stock Option Plans (ESOPs)

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An ESOP is a qualified benefit plan in which the business owners have sold some or all of their shares to an ESOP trust. This trust owns the shares on behalf of the employees, providing beneficial ownership of the company to all qualified employees of the company. As a business grows, so does the value of the shares allocated to employees. This creates a direct connection between the business’s success and the employee’s financial benefit.

How do employees benefit from ESOPs?

Employees benefit from ESOPs in three main ways: they gain retirement benefits, they feel a sense of job security, and they feel more engaged and committed to their company’s success.

Who is eligible to receive ESOPs in India?

ESOP grants are only available to permanent employees of the company or its subsidiaries. As a result, part-time staff, contractors, counselors, and mentors are ineligible for ESOPs.
ESOPs are also available to directors on the board. An investor/adviser on the company’s board of directors is qualified for ESOPs; however, a board observer or an independent director on the board is not. DPIIT-recognized startups’ founders/promoters are register for ESOPs for up to ten years from the date of incorporation. On the Startup India website, you can apply for the DPIIT recognized startup certificate

How does an employee benefit from ESOPs?

Employee stock ownership plans (ESOPs) allow employees to buy company stock at a discounted price and sell it at a profit after a fixed period of time, determined by the employer. If the timing is correct and the business does well, an employee can build wealth through ESOPs.

Tax Implication of ESOPs

The difference between the market value and the exercise value is consider a prerequisite when the employee exercises his incentive to purchase the stock. It is taxable according to the employee’s tax bracket. The benefit is view as capital gains when the employee sells the shares.

If the shares are sold within a year, a 15% capital gains tax will be charge, just as for any other acquisition or selling of stock. If the stock is sold after one year because than it is considered long-term and tax will be charged @10%.

ESOPs have always been consider as a brilliant option by many companies, start-ups and established companies alike, majorly as a means of employee retention which in turn benefits the employees and as well as employers.

But while choosing an ESOP plan, every company must consider all factors in relation to how the ESOPs need to be distribute, to which employees and the tax implications involved in the same, prior to providing the ESOP option to its employees.

The employees must also keep themselves abreast with the knowledge about what ESOPs are, how they function, the advantages they provide and the tax ramifications they have. Employees should also keep in mind that ESOPs have a vesting time before they may be exercise.

For more information reach out CA Neetu Jain

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