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Tarun Suthar
•
The Institute of Chartered Accountants of India • 20d
What is an ESOP (Employee Stock Ownership Plan)? ----- Explained. (Employee Perspective) Imagine your company gives you a chance to own a piece of the business. That’s what an ESOP is company shares reserved for employees like you. You don’t get them all at once, and you don’t get them for free, but you get them at a much lower price than the public would pay. ⁉️ How ESOP Works in 4 Simple Steps 1. Grant Your company says: “We’re giving you 10,000 shares at ₹100 each. You’ll earn the right to own them over time.” 2. Vesting Period This is like a waiting period. Shares become yours gradually, often over 4 to 5 years. For example, if you stay 5 years, you get to keep 100% of them. 3. Leaving the Company If you leave early, you only keep the shares that have vested. The rest are forfeited. 4. Redemption (Selling Your Shares) After they’re vested, you can sell your shares-maybe when the company goes public (IPO), buys them back, or gets acquired. ⁉️ Taxxxes (Yes, There Are Two Stages)👀 1. At Exercise When you buy the shares You pay tax on the difference between the market price and the price you pay (this is called “perquisite tax”). 2. At Sale When you sell the shares You pay tax on the profit (sale price minus market value at the time you exercised the shares). ✅️ If you held them for >1 year: Taxed at 12.5% ✅️ If <1 year: Taxed at 20% Example: Rahul's ESOP Journey He’s given 10,000 shares at ₹100 each After 5 years, the shares are worth ₹500 (market value) He buys all 10,000 shares at ₹100 = ₹10,00,000 Since market value is ₹500, the taxable amount is ₹40,00,000 and he pays ₹12,00,000 tax 2 years later, he sells them at ₹1,200 per share Profit = ₹1.2 Cr - ₹50L = ₹70L Capital gains tax @12.5% = ₹8.75L Net Profit = ₹61.25L
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