Employee Stock Option Plan (ESOP)

The employees of the company are entitled to the ESOP but company specified certain criteria to make employees eligible for it. ESOP scheme can be claimed by –

• Permanent employees of the company working inside or outside India.
• A part time or full time director of the company
• An employee working in a holding, subsidiary or associate company within or outside India.

Employee stock option plan offers benefits to the company as well as to employees who choose to exercise the option.

• It motivates the employees and creates ownership interest in them to work together for a common goal i.e. company growth.
• Employees become more loyal towards the company.
• The brainstorming sessions are conducted to find new techniques to increase company’s productivity.
• Employees work in unity to reduce the wastage in the organization
• It increases the trust factor of the working employee in the management and company too.
• Due to highly motivated workforce, employees try to achieve more & more to increase the company’s share value.

ESOP offers several benefits to employees –

1. Employee stock option plan brings various financial benefits to the employees of the company such as higher pay, overall wealth generation, other benefits etc.
2. Employees feel more responsible towards the organization by holding the shares of the company. They also participate in the decision making process of the organization which make their attitude more positive towards the organization in future.
3. After getting both monetary & non-monetary benefits from the organization. Employees feel more satisfied and more secured in job. Therefore, ESOP helps in satisfying the employees too.

• Options provided by the company are not taxable
• Vested options are not taxable
• Company offers shares to employees at a less price in comparison to fair market value price. The price at which the employee may exercise the option is known as exercise price.
• When employee exercises the option of buying shares, the tax will be imposed on the employees as per the tax bracket based on the difference between the market value of the shares & exercise value of the shares.
• If the employee sells its shares after increase in the price of share, it is considered as capital gains whereas loss in selling the shares is known as capital loss. If an employee sells the shares within 1 year, 15% tax is levied against the capital gain but if employee sells the shares after 1 year, he will not be taxable and they are considered as long term assets.
• If an employee is working in a company based in abroad and having employee stock option plan too, the shares sold by the employee and the amount received will be considered as short term capital gain & will be added to the income of the employee. The employee will be taxed, if it falls into the income tax brackets (whichever may be)
• If there are long term capital gains –
  1. 20% of tax levied with the benefit of indexation.
  2. 10% of tax levied without the benefit of indexation.