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What is Employee Stock Option Plan?
Employee Stock Option Plans, or ESOPs, allow employees to buy a company's stocks at a pre-fixed value at a later date. It engages staff by providing them equity participation in the company, resulting in employee retention and a lower attrition rate. Startups and organizations who are unable to offer hefty salary packages frequently award their employees with company shares.
Tax Implication on ESOP
When a specific time period from the date of the grant has passed, shares are vested in the employees, which means that the employee has an unconditional right to receive the share.
The difference between the fair market value of the shares on the exercise day and the price paid by the employee for the exercise or subscription to the shares is computed and taxed at the time of allotment of shares on the exercise date. Perquisite value is the name given to this taxable worth. (FMV- Exercise Price) When an employee sells the shares that were given to him under an ESOP, he must pay tax on any earnings or gains that result from the transaction. Such profit is subject to taxation under the heading of "Capital Gains" (Sales Value – FMV). Capital gains are further divided into 'Short Term Capital Gains' and 'Long Term Capital Gains’, depending on the holding period of such shares. Long term capital gain (when shares are held for more than 12 months) is taxable at 10% and Short term capital gain is taxable at 15%.