As mentioned in the earlier article, ESOPs, or Employee Stock Ownership Plans, allow employers to offer their employees the opportunity to purchase the company’s shares at a discounted or no cost. After holding these stocks for a specified period, employees can sell them at a predetermined price. For a detailed introduction to ESOPs and their taxation, you can refer to the article titled "What are ESOPs?”
These Esops can be listed as well as unlisted companies. Employers determine the number of shares to allocate, their pricing, and which employees will receive them. These ESOPs are then placed in a trust for a designated vesting period, during which employees are required to stay with the company. Once this period concludes, employees gain the right to use their ESOPs to purchase company shares at a reduced rate compared to the market price.
ESOPs offer tangible benefits to employees, such as ownership stakes in the company, dividend payouts from the company's profits, and the opportunity to buy company shares at a special discounted rate. On the other hand, employers benefit from ESOPs by fostering employee retention, enhancing productivity, and attracting top talent to their organizations.
Establishing an ESOP in India comes with its set of initial expenses, which include legal fees, accounting costs, and administrative charges. Employees are given the flexibility to decide whether to sell the acquired shares immediately or hold onto them, hoping for potential future appreciation.
Understanding the vestind period :
Before coming onto selling Esops it is very crucial to understan certain terms such as “vesting period”, “exercize price”,” exercise date”.
Under an Employee Stock Ownership Plan, employees are given the opportunity to buy company shares at a discounted price or sometimes for free. This right to buy shares is known as a stock option.
The terms and conditions for when an employee can exercise this right are outlined in the ESOP scheme. Usually, employees can't immediately buy the shares; they have to wait for a specific period called the lock-in period, which is typically more than one year. After this lock-in period, the employee gains the right to exercise their option on certain future dates, known as "vesting dates."
The vesting of shares can happen either fully or partially over time. For instance, if an employee receives 1,000 stock options on March 31, 2016, they might be allowed to exercise 20% of these options after one year, 30% after two years, and the remaining 50% after three years. So, the vesting dates for different portions of the options would be spread out over these years.
The price employees pay to purchase these shares, are "grant price" or "exercise price," is usually determined when the options are awarded.This price is usually much lower than the market price of the company's shares.
Importantly, having an option to buy shares doesn't mean the employee is obligated to do so. They can choose to buy the shares at the exercise price or let the option expire, especially if the market price of the shares is lower than the exercise price. If they decide to buy, the date they do so is called the "exercise date."
Taxation on buying and selling Esop:
Taxation is a important factor to consider when dealing with ESOPs in India. Employees face taxation when they exercise their rights to purchase company shares and again when they decide to sell these shares. The tax treatment varies based on the duration for which the shares are held. Notably, special tax provisions are in place for employees of start-ups to alleviate their tax liabilities related to ESOP benefits.
*Disclaimer: This information is for private use only and does not constitute investment advice. Recipients must assess risks and seek advice from financial, legal, and tax professionals. Private market investments carry risks, and there are no guarantees of returns or capital protection. We are not liable for investment decisions.
