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All about Employee stock option plan (ESOP)

In this article we would cover the following :

  1. What is ESOP?

  2. Who is eligible for ESOP?

  3. How does ESOP work in an organization?

  4. What are the benefits of ESOP?

  5. Tax on ESOP

1. What is ESOP?

Employee stock option plan (ESOP) a worker advantage plan under which the organization motivates its employees to obtain ownership of the company as it offers shares. These offers are offered to the employees at a rate lesser than the common market rate.

Aside from the worker advantage plan, ESOPs are likewise intended to adjust the interests of the employees to that of the investors. It is accepted that the workers, who are additionally the investors, will concentrate better on organization execution and development so the estimation of their offers increases in value.

2. Who is eligible for ESOP?

Basically, the workers of an organization are qualified for the Employee Stock Option Plan (ESOP) but the Company sets a specific rule to make employees qualified for the equivalent. Advantages under the ESOP plan can be guaranteed by the following:

· A permanent employee of the organization working in or outside India

· Temporary or part time employee of the organization

· A part time or whole-time director

· A worker of holding, subsidiary or partner organization, regardless of whether in India or outside India

· Promoters or Directors of the organization holding beyond 10 percent of its value can't participate in an ESOP.

3. How does ESOP work in an organization?

Under the Employee Stock Option Plan (ESOP), the organization allows its workers a choice to purchase a specific number of shares at a predefined value which is typically lower than the market cost. ESOPs in India are administered by the Companies (Share Capital and Debenture) Rules, 2014.

ESOPs are normal among beginning period new businesses. From a beginning up's point of view, these are the means to offering an ESOP-

· As a matter of importance, the organization drafts an ESOP proposal and gets it’s approval in an investor's meeting called by an organization. Previously this was to be granted by the Registrar of Companies, but due to change of rules, there is no requirement of approval from ROC only for privately owned companies.

· After endorsement of the ESOP plot in an investor's meeting, a 'Letter of Grant' is to be given to the concerned employees. This letter must contain data about the quantity of shares bought, investing period, etc.

4. What are the benefits of ESOP?

1. Company benefits:

o They make possession enthusiasm among employees with the goal that they have shared objective of organization development.

o This prompts a profoundly energetic workforce that needs to accomplish all the goals that their association's offer worth increases in value.

o ESOPs likewise increment of the workers' trust in the administration and the organization itself.

o Helpful during the initial basis when a company is setting up its profile.

o ESOP help organization in gaining some selfness towards the organization.

o Tax deductible expenses during the vesting period

2. Employee benefits:

o ESOPs certainly acquire budgetary advantages to the employees. It likewise permits an agreeable retirement for them.

o Holding the shares of the organization, they feel increasingly capable towards the association.

o They effectively take an interest in the organization's dynamic procedures which, thus, make them idealistic towards the association.

o As a consolidated impact of fiscal and non-financial advantages, ESOP gives better professional stability and occupation fulfillment to the worker

5. Tax on ESOP:

The ESOPs tax charges at two accounts once at the time of selling of shares (generally in Income tax terms we called it as Capital Gain) and second at the time when company allows the option of purchase to the employees.

When exercising your choice, it is considered as a perquisite and taxable as part of your salary. At the point when these shares are sold by the organization, there will be either capital increase or capital loss. TDS is deducted by the business in the principal case of perquisites as a salary by the employer.


Shares given by the organization to its employees are not taxable (i.e. at the rate which is prevalent in the market and not through the route of the ESOP’s)


1. Do we become an investor in the organization after the ESOP is allowed or granted to us?

No. Granting of ESOP doesn't make you an investor. You need to follow on the activity cost to practice your alternative and convert it into shares. Only after this point will you be an investor.

2. Can a holding organization issue ESOPs to the workers of a subsidiary organization?

Yes, given that there is a rule with respect to this in the Article of Association.

3. Is ESOP a legal act? Who administers the ESOPs in India?

Indeed, ESOPs are totally legal and there are a few corporate and lawful compliances identified with the ESOPs. SEBI, Income Tax Act and Companies Act manage various parts of ESOPs.

4. What level of salary can be offered as ESOP?

There are no set standards with respect to this. This relies upon the company’s desires, level of business, and so on.

5. Can the organization change guidelines concerning ESOP after it is allowed and acknowledged by the representative?

Indeed. It tends to be changed. In the majority of the cases, such changes are agreeable to the employees.

6. Can you sell the possessed shares?

Yes, the worker can sell the shares.

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