A Low-Down On Taxation Of ESOPs

Employee Stock Option Plans are usually a win-win for both the employee and the employer. But look at the tax rules before you exercise the same

- Keerthi Sanagasetti

The Employee Stock Option Plan (ESOP) is perhaps one of the best methods of rewarding employees for their contribution to the company, considering that it is a win-win for both the employee and the employer.

ESOP essentially refers to an option offered to the employees which gives them the right to purchase the shares of the company at a future date (on expiry of a vesting period) at a pre-determined price. At the end of the vesting (lock-in) period, the employee can opt to purchase the shares, which is referred to as exercising the ESOP.

By doing so, an employee gets to participate in the profits of the company upon paying a concessional price, which is the exercise price. At the same time, the company is also assured of their interests being aligned towards organisational goals, by giving the employees a share of the pie.

If the markets continue with a bull phase, ESOPs can generate enormous returns for an employee. That said, the returns will have to be weighed against the hefty taxes to be paid.

If you have been granted an ESOP by your employer and are evaluating whether or not to exercise the same, a look at the tax rules governing these will aid the decision.

Perquisite

The first instance of taxation of ESOPs is at the time of exercising the option. The employee will have to add the value of shares allotted under the ESOP to their income from salaries, in the year of exercising the same.