ESOP, or Employee Stock Ownership Plan, is an employee benefit plan that an employer offers its employees. It allows the employees to purchase the company's stock at a low-market price that they can encash after a certain period at a specific price. Besides, it also provides the employees with ownership interest. Organizations may issue ESOPs through profit-sharing plans, direct stock, or bonuses. But, employees must understand ESOP taxation before exercising this option.
In today's era, employees receive much more than just a monthly salary slip. One such advantage is the Employee Stock Ownership Plan (ESOP), wherein employers decide how many shares to offer. However, before granting ESOPs to any employee, the employer must follow specific rules and regulations as per the Companies Act 2013. Once these regulations are followed, employers can offer ESOPs to employees with a particular grant date.
That implies that the particular employee must stay with the company during the vesting period to gain stock ownership via exercising ESOP. After the vesting period expires, the employee will have full rights to exercise the ESOPs.
If the employee leaves the company for any reason before the vesting period, the organization must repurchase the ESOP at a fair market value within 60 days. It is essential to remember that tax on ESOP in India is mainly done as a prerequisite. It is subject to taxation during the exercise or share transfer period to the employee.
Individuals must understand the tax on ESOP in India before their employers implement an ESOP scheme. There are dual implications of ESOP tax.
Now, let's delve deeper to understand all these implications in detail.
The employers can purchase the company share at a lower rate than FMV or Fair Market Value after the vesting period. When employees exercise the stock option, it will be a taxable income. Then, the shares will be credited to the employee's Demat Account once the shares are bought. Here is the ESOP taxation at the time of purchasing the claim.
When the company's employees sell the company share, it will be directly subject to the capital gains tax. Here is the ESOP taxation when selling the company shares.
Understanding what the ESOP is with its tax implications and how they work is crucial before you proceed further. Also, you must pay attention to the vesting period before exercising ESOP. Furthermore, consider using an ESOP tax calculators to determine the tax liability while exercising ESOPs or selling them.
The ESOP or Employee Stock Ownership Plan is mainly calculated on the difference between the ESOP exercise and FMV prices. The calculation also considers the number of ESOP shares, vesting period, etc.
Yes, the ESOP expense is entirely taxable. If the employees hold the company share for less than 12 months, the tax rate on their gains will be 10%. But, if any employee has the company share for more than 12 months, the concessional tax rate will be 15% on the overall gain.