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Employee Stock Option Plan

Uncovering the facts on a Sop called ESOP

by Holistic Leave a Comment | Filed Under: Investments

In this competitive world top talent is highly sought after. It gives the organizations that cutting edge. However recruiting alone is not an end to the process of building the organization, instead it is much more important to retain such talent in their ranks.

It is therefore not without reason that organizations think about new sops to retain topleadership talent. ESOP is one such potent tool to retain potential leaders.

What is ESOP?

Employee Stock Option Plan or ESOP is a plan extended to employees, making them part owners of the company. Among the different motivating tools available to the management now, ESOP is one of the best for attracting, retaining, rewarding, and compensatingthe employees of the organization. ESOP is also referred to as Sweat Equity Shares in certain companies.

Getting Familiar with ESOP

There are certain terms associated with ESOP and understanding such terms is the key to unlock the mechanism of the plan. Terms like -Grant date, vesting date, Vesting period, Exercise period, Exercise date and Exercise price constitute the major components of the plan.

When ESOP is offered to an employee, on a particular date it is agreed between the two parties that the offer will be made at a future date. The date of agreement is known as the grant date.

On a particular day, after the lapse of a particular period or when certain conditions have been fulfilled, the employee becomes eligible to purchase shares under the ESOP. Such date of eligibility is known as vesting date.
The period lying between the grant date and the vesting date is known as the vesting period.

Once the employee becomes eligible to make the purchase under ESOP, he or she is allowed a certain time framein which to exercise his options of purchase. This time period is called the exercise period.

Exercise date is the specific date on which the employee exercises his option to finally make the purchase under ESOP.

Under ESOP, the employee is offered a preferential price for acquiring the shares of the company. This price is lower than the prevailing Fair Market Value (FMV) of the share and is termed as exercise price.

Taxability and ESOP

World over, there are different models of employee stock option plans available: Employee Stock Option Plan (ESOP), Employee Share Purchase Plan (ESPP) and Stock Appreciation Rights Plan (SAR).

In the Indian context the ESOP model is prevalent because of the existence of certain legal regulatory framework. In the global market the ESPP and SAR models are more popular. Here we will examine the taxability implications of ESOP as it is more relevant to India.

There are two instances of taxability for ESOP

The first instance of taxability is triggered when the shares are allotted or transferred.At this point, the benefit arising to the employee is the difference between the Fair Market Value (FMV) on the date on which the option is exercised less the amount actually paid or recovered from the employee.This is a perquisite in the hands of the employee and is hence taxable.

The next instance occurs in the event of sale/transfer of shares. The difference between the sales consideration and the fair market value on the date of exercise is treated as capital gains and is subject to capital gains tax. The capital gain could be in the nature of long term or short term, depending upon the period of holding of such shares/securities.

This may be depicted thus

Acquiring shares by Exercising Option FMV – Exercise Price = Perquisite TAX
Selling shares Sale value – FMV on exercise date = Capital Gain TAX (If long term in nature)

Capital Gain Status

If the shares procured through ESOP are disposed of before 1 year then it is treated as a short term capital gain which attracts income tax at the rate of 15%. If such sale is made beyond one year then it is considered to be long term capital gain. At present, listed equity shares (where STT is paid on sale) are considered long term when held for more than 1 year and are tax free.

The period of holding is calculated from exercise date up to the date of sale.

Residential Status and Taxability

Indian citizens whose tax status is resident, are liable to pay taxes on all incomes which they have received from anywhere in the world. However, if the status is non-resident or not ordinarily resident then such individuals may have to pay taxes outside India too for perquisites as well as sale of ESOP shares. In certain cases individuals may get the benefit of double tax avoidance treaty which ensures that the same income is not taxed twice.
Income tax rules also state that in cases where an employee owns shares of a foreign company under the ESOP scheme, they have to declare such foreign asset holdings in their income tax returns forms.

Conclusion

Hope this article uncovers the less known facts about ESOP and gives better clarity in taking the investment decision.

If you have any comments or questions, write them in the comment box below.

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Holistic Investment is really nice and trust worthy financial planner. They plan things in realistic manner and also consider future dimensions of items also. They are always available for small or big queries, and also share knowledge and help you become more financial literate, and take right decisions in all financial matters.
Dr. Padmakar Wagh
Dr. Padmakar Wagh
27. June, 2023.
Mr Ramalingam who is the Director of Holistic investments has a excellent financial planning knowledge, the entire Holistic team has been very helpful in my financial planning journey and execution. This is my third year of financial planning with Holistic investments and so far I am satisfied with the progress I have made.
Binamra Dash
Binamra Dash
13. June, 2023.
Very knowledgeable team. Guided me properly with my concerns.
Murugan Bala
Murugan Bala
16. May, 2023.
I have been investing through Holistic for the past 4 years and my experience with them have been really good. The team of Rajan and Ramalingam doing excellent services in meeting my needs through proper guidance on investment options customized. Theya re always available on any specific needs time to time.I would recommend their services to my friends and colleagues too.
Neeraja R K
Neeraja R K
15. May, 2023.
Working with holistic investment planners was a really wonderful experience for me. For me the entire team had been very supportive in all ways. Their working strategy is well planned and methodical. They always keep me informed and updated about my investments, so that i can take informed decisions. The team first helps us understand the basics of investments, then they collect data, work with the data and then provide investments solutions according to our goals which i find it the best. Good luck to the entire team.
deepika kulkarni
deepika kulkarni
21. April, 2023.
We have availed holistic service from last couple of years and are very happy with our decision. Their systematic approach has helped us plan our finances and meet our goals. They provide very comprehensive and detail plan and resource management every 6 months which ensures we are on right track to achieve our goals. Rajan and Ramalingam from holistic are always there to help us with our queries. They have also accommodated any changes to our goals or resources mid year in a professional manner.
Ashook Panneerselvam
Ashook Panneerselvam
21. March, 2023.
For the past year, I have been interacting with Holistic Investment. I frequently read Nanayam Vikatan, which is a publication owned by the Vikatan family, and I was impressed by their financial advice. My brother also suggested holistic investing, and he also got excellent financial advice. Holistic Investment follows a methodical approach that I really liked because they first fully understand our financial situation "As Is," which includes "Assets" and "Liabilities," as well as our short-, mid-, and long-term goals, on the basis of which they provide a detailed plan on how to achieve our goals for which they are recommending various investment options. Even in the investment advice, why do they suggest particular mutual funds and what is the justification behind it, which adds transparency to the client. One essential factor is that they are always available. Even if I needed to make some urgent financial decisions, they were very helpful and kind to answer my questions via phone calls, WhatsApp messages, and emails. I was very happy with their service. Periodic reviews are also crucial, even though I have forgotten that they occur once every three months, and I also intend to renew this year.
Mahesh S
Mahesh S
19. February, 2023.
I have availed Holistic investment service for last 1yr against my early retirement decision. they provided me comprehensive detailed report how to move ahead with my existing resources. moreover, they are available to me whenever i have any doubt.. highly recommend others to avail their service
Google rating score: 4.5 of 5,
based on 104 reviews

Google Reviews

Lingesh MMG
Lingesh MMG
20. September, 2023.
Na eppo tha financial goal la enna therunju kitta..enaku full support panna thuku thank you..🥰 friendly nalla pesuninga...
Ravi L
Ravi L
15. August, 2023.
Very knowledgeable and professional team, guided me with the precise financial solutions and timely suggestions.
Hardik Dave
Hardik Dave
5. July, 2023.
Holistic Investment is really nice and trust worthy financial planner. They plan things in realistic manner and also consider future dimensions of items also. They are always available for small or big queries, and also share knowledge and help you become more financial literate, and take right decisions in all financial matters.
Dr. Padmakar Wagh
Dr. Padmakar Wagh
27. June, 2023.
Mr Ramalingam who is the Director of Holistic investments has a excellent financial planning knowledge, the entire Holistic team has been very helpful in my financial planning journey and execution. This is my third year of financial planning with Holistic investments and so far I am satisfied with the progress I have made.
Binamra Dash
Binamra Dash
13. June, 2023.
Very knowledgeable team. Guided me properly with my concerns.
Murugan Bala
Murugan Bala
16. May, 2023.
I have been investing through Holistic for the past 4 years and my experience with them have been really good. The team of Rajan and Ramalingam doing excellent services in meeting my needs through proper guidance on investment options customized. Theya re always available on any specific needs time to time.I would recommend their services to my friends and colleagues too.
Neeraja R K
Neeraja R K
15. May, 2023.
Working with holistic investment planners was a really wonderful experience for me. For me the entire team had been very supportive in all ways. Their working strategy is well planned and methodical. They always keep me informed and updated about my investments, so that i can take informed decisions. The team first helps us understand the basics of investments, then they collect data, work with the data and then provide investments solutions according to our goals which i find it the best. Good luck to the entire team.
deepika kulkarni
deepika kulkarni
21. April, 2023.
We have availed holistic service from last couple of years and are very happy with our decision. Their systematic approach has helped us plan our finances and meet our goals. They provide very comprehensive and detail plan and resource management every 6 months which ensures we are on right track to achieve our goals. Rajan and Ramalingam from holistic are always there to help us with our queries. They have also accommodated any changes to our goals or resources mid year in a professional manner.
Ashook Panneerselvam
Ashook Panneerselvam
21. March, 2023.
For the past year, I have been interacting with Holistic Investment. I frequently read Nanayam Vikatan, which is a publication owned by the Vikatan family, and I was impressed by their financial advice. My brother also suggested holistic investing, and he also got excellent financial advice. Holistic Investment follows a methodical approach that I really liked because they first fully understand our financial situation "As Is," which includes "Assets" and "Liabilities," as well as our short-, mid-, and long-term goals, on the basis of which they provide a detailed plan on how to achieve our goals for which they are recommending various investment options. Even in the investment advice, why do they suggest particular mutual funds and what is the justification behind it, which adds transparency to the client. One essential factor is that they are always available. Even if I needed to make some urgent financial decisions, they were very helpful and kind to answer my questions via phone calls, WhatsApp messages, and emails. I was very happy with their service. Periodic reviews are also crucial, even though I have forgotten that they occur once every three months, and I also intend to renew this year.
Mahesh S
Mahesh S
19. February, 2023.
I have availed Holistic investment service for last 1yr against my early retirement decision. they provided me comprehensive detailed report how to move ahead with my existing resources. moreover, they are available to me whenever i have any doubt.. highly recommend others to avail their service
Google rating score: 4.5 of 5,
based on 104 reviews

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