What is an Employee Stock Ownership Plan (ESOP) - Definition, Tax Rules, Benefits, etc.: - www.deekpay.com

Against the backdrop of a highly competitive modern job market, companies are constantly introducing new benefit policies to attract and retain the best talent. One popular employee benefit plan offered by many companies around the world is the Employee Stock Ownership Plan (ESOP). Does your company offer an ESOP, and would you like to learn more about what an ESOP is and how you might benefit from it?

This article will explain the definition of an ESOP, how it works, the benefits, and the tax treatment of an ESOP. Get an in-depth look at this employee benefit plan so you can make a decision on whether or not to adopt it.

What is an ESOP?

The full name of ESOP is Employee Stock Ownership Plan. The scheme gives employees in the organisation the benefit of ownership of company shares by providing them with the opportunity to hold shares in the company. Employees do not have to pay an additional fee to purchase company shares, and even if there is an additional fee in some cases, it is usually very low. Employees can realise these shares after an agreed period of time.

How does the ESOP work?

In India, ESOPs typically work as follows: the company first decides on the number of shares it is willing to share and the list of employees who are eligible to purchase those shares. The company then grants the shares to the employees and sets a grant date. Until the specified grant date, the employee does not have ownership of the offered shares. During this period, the shares are held in a trust fund and this period is known as the vesting period.

Under ESOP rules, employees can acquire ownership of stock at the end of the vesting period. They can purchase the stock at specified prices, which are usually well below the fair market price. From that point on, employees can choose to hold the stock or sell it at the market price, thereby profiting from the asset.

Assuming the employee leaves the company without completing the vesting period, the company will buy back the employee's ownership of the shares at the market price.

What are the tax rules for ESOPs in India?

Many Indian companies offer benefits to their employees in the form of ESOP. But before accepting this benefit, you should understand the tax treatment of ESOP.

The tax treatment of ESOPs is divided into two scenarios:

1. When an employee purchases shares from the company.

2. When an employee sells shares for profit.

In both cases, there are tax implications, and the amount of tax depends on the exercise price of the ESOP versus the market price. The exercise price is the price at which the employee purchases stock from the company and exercises the ESOP.

In the first case, the difference between the ESOP exercise price and the market price is taxable. The employer deducts tax deducted at source (TDS) from the employee's benefits and reflects it in Form 16.

In the second scenario, when an employee sells shares for a profit, the tax will be levied on the difference between the sale price and the market price of the shares on the exercise date.

ESOP Benefits to Employees

ESOPs benefit both employers and employees. The benefits employees receive from an ESOP include:

1. Opportunity to purchase company shares at a lower price: after the end of the vesting period, employees can purchase shares from the company at a price lower than the market price.

2. Shared ownership of companies: Employees have the opportunity to buy shares in the companies in which they work and share the capital.

3. Retirement assets: If the vesting period is long and the value of the shares has increased significantly over time, the value of the assets will be enhanced to support employees in retirement.

concluding remarks

An ESOP is a benefit plan designed for employees to have an ownership interest in shares of the company. If you would like to learn more about ESOPs and their features, read the FAQs below.

Frequently Asked Questions

Is an ESOP safe in a startup? Startups have the potential to be as successful as any other business. Therefore, it is critical to understand the expected growth and vision of a startup before participating in its ESOP.How is the ESOP stock price determined?The ESOP stock price is affected by a number of factors, including the company's current performance, expected future performance, and the company's location. What are the benefits to employers from an ESOP? The benefits that employers derive from ESOPs include increased employee performance and improved employee retention in the organisation.