{"id":396,"date":"2019-04-01T08:37:13","date_gmt":"2019-04-01T08:37:13","guid":{"rendered":"https:\/\/rta.saginfotech.com\/blog\/?p=396"},"modified":"2019-04-01T08:45:39","modified_gmt":"2019-04-01T08:45:39","slug":"overview-employee-stock-option-plan","status":"publish","type":"post","link":"https:\/\/rta.saginfotech.com\/blog\/overview-employee-stock-option-plan\/","title":{"rendered":"A Brief Overview of Employee Stock Option Plan (ESOP)"},"content":{"rendered":"\n

Employee Stock Option Plan (ESOP)<\/strong> refers to the employee benefits scheme under which the employees are allowed to purchase the shares of their company. The company encourages the employes to acquire firm ownership by offering the shares at a below-market rate in order to increase their involvement in the scheme. In many cases, the companies in India also offers the stocks as a remuneration up to a specific percentage to employees. <\/p>\n\n\n\n

Who is Offered with ESOP and Why It is Given? <\/strong> <\/h2>\n\n\n\n

Mainly, the employees, who are part of a particular company are offered to opt for the ESOP, but at the same time, some criteria are also decided by the companies to make employees eligible for the same. <\/p>\n\n\n\n

So, the key benefits offered under ESOP can be claimed by: <\/strong><\/p>\n\n\n\n

  • A permanent\n\temployee of a firm, who is entitled to work in or outside India \n\t\n\t<\/li>
  • A part-time\n\temployee or whole director of the company\n\t<\/li>
  • An employee of\n\ta subsidiary, holding, or associate company, whether residing in\n\tIndia or working from abroad \n\t\n<\/li><\/ul>\n\n\n\n

    If we talk about the\nneed for ESOPs, then a multitude of reasons exist. Generally, the\nstart-up businesses in India are found to giving ESOP option to their\nemployees, as they are unable to manage the large compensation of\ntheir elite employees. Apart from benefiting the employees, ESOPs are\nalso aimed to align the employed interest with that of shareholders. \n<\/p>\n\n\n\n

    The general belief\naround ESOP is that it increases employees focus towards improving\ncompany performance so that the value of their shares also uplift.\nSome of the employers also give the ESOP to employees with future\nliquidity option as a means to incentivize them for their long-term\ncommitment. \n<\/p>\n\n\n\n

    What is the Working Procedure of ESOP?<\/strong><\/h2>\n\n\n\n

    The Companies (Share Capital and Debenture) Rules, 2014 in India governs the ESOP in India.<\/strong> As per this Act, the employees are granted with the permission of buying a certain number of stocks in a company by the owners that too at a price below the standard market rate. <\/p>\n\n\n\n

    From a startup perspective, the general steps followed for offering an ESOP are enlisted below:<\/strong><\/p>\n\n\n\n

    • An ESOP scheme<\/strong> is first drafted and submitted to shareholders for approval. Earlier approval for this scheme needs to be obtained by a \u2018special resolution\u2019<\/strong> and filed with the Registrar of Companies, but w.e.f. June 5, 2015, the private limited companies were expected to comply with the practice mentioned above. <\/li>
    • A \u2018Letter of Grant\u2019<\/strong> should be issued to agitated employees after the ESOP scheme draft gets approved in a shareholders meeting. Noteworthy details for share buying are coded in the letter for employees. <\/li>
    • Lastly, the employees after receiving \u2018Letter of Grants\u2019 can opt for the ESOP option using the \u2018Exercise Application\u2019.<\/strong> <\/li><\/ul>\n\n\n\n

      What are the Key Benefits of ESOP?<\/strong><\/h2>\n\n\n\n

      For Employers <\/strong>\n<\/h4>\n\n\n\n
      • Ability to\n\tbuy shares of a departing owner:<\/strong> Private company owners can\n\teasily sell their shares in a company through ESOP option.\n\tTax-deductible contributions to the ESOP are allowed to companies to\n\tbuy out the shares. \n\t\n\t<\/li>
      • Lend money\n\tat a lower after-tax cost: <\/strong>The cash borrowed using the ESOP can\n\talso be used by the companies to by other company shares and shares\n\tof existing owners. Adding to this, the ESOP contribution by\n\tcompanies are also deductible as they need to repay the loan amount.\n\tBoth principal and interest are tax deductible. \n\t\n<\/li><\/ul>\n\n\n\n

        For Employees <\/strong>\n<\/h4>\n\n\n\n
        • The employees\n\tenjoy greater financial benefits in the form of higher pay,\n\tbenefits, and wealth generation. It also ensures a comfortable\n\tretirement for employees. \n\t\n\t<\/li>
        • Employees after\n\tholding shares in a firm feel more responsible towards their\n\tcompany. Employees also take active participation in company\n\tdecision-making, which in a way make them optimistic, visionary, and\n\tself-organized. \n\t\n\t<\/li>
        • ESOP also\n\tprovide better job security and satisfaction to employees owing to\n\tthe underlying monetary as well as non-monetary benefits.\n<\/li><\/ul>\n\n\n\n

          Tax Implications\nof ESOP<\/strong><\/h3>\n\n\n\n

          Taxes are Prevalent in ESOPs at Two Major Instances – <\/strong><\/h4>\n\n\n\n

          first at the time of exercising and second during the selling of shares. <\/p>\n\n\n\n

          Employees when exercising the option are taxed as the earned benefits are considered as a prerequisite. Employers also deduct taxes in the first instance of prerequisites whereas at the second instance the price difference between the fair market value of shares and the selling price of shares is known as the capital gains and taxed accordingly. <\/p>\n\n\n\n

          Some Noteworthy Details about Tax Implications in ESOP Include:<\/strong><\/h4>\n\n\n\n
          • Vested options\n\tby a company to the employees are not taxable.\n\t<\/li>
          • If the shares\n\tsold by the employees belong to a foreign company than the profit\n\tmade on the same is termed as short-term capital gains and taxed\n\taccordingly. \n\t\n\t<\/li>
          • The employees\n\twho sell their company shares within one year are levied with 15%\n\ttax whereas after one year then those shares are considered as long\n\tterm assets and are not taxable. \n\t\n<\/li><\/ul>\n\n\n\n

            Key Terminologies Related to ESOP:<\/strong><\/h3>\n\n\n\n

            It is essential for\nthe employees to understand the key terminologies that are used under\nESOP by employers. \n<\/p>\n\n\n\n

            Here are some of the important terms that are frequently used in ESOPs: <\/strong><\/p>\n\n\n\n

            • Grant:<\/strong>\n\tIt refers to the promise made by an employer in relation to the\n\tissuance of \u2018Letter of Grant\u2019, which informs employees about\n\ttheir eligibility under the ESOP scheme. \n\t\n<\/li><\/ul>\n\n\n\n
              • Vesting:\n\t<\/strong>This legal term denotes the process by which an employee gets\n\tthe right to own the shares of a particular company for a specified\n\ttime duration. Once vesting happens, the benefits of the plan or\n\tstock cannot be revoked by a particular employee. \n\t\n<\/li><\/ul>\n\n\n\n
                • Exercise: <\/strong>At\n\tthe initial stage of ESOP, the company grants an option for\n\temployees. The process of converting those shares into options by\n\temployees is termed \u2018exercising\u2019 the option. \n\t\n<\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"

                  Employee Stock Option Plan (ESOP) refers to the employee benefits scheme under which the employees are allowed to purchase the shares of their company. The company encourages the employes to acquire firm ownership by offering the shares at a below-market rate in order to increase their involvement in the scheme. In many cases, the companies […]<\/p>\n","protected":false},"author":1,"featured_media":399,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"yoast_head":"\nBrief Overview of Employee Stock Ownership Plan (ESOP) | SAG RTA<\/title>\n<meta name=\"description\" content=\"Employee Stock Option Plan(ESOP) refers to the employee benefits scheme under which the employees are allowed to purchase company shares. 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