Are you a public firm’s employee or any firm for that matter? Well, did you know you could own your company? Well, this does not mean you can buy your company with money, instead, it means you can be part owner. Don’t be too shocked, but yes, it is true. You can do so through ESOP. First, you must be aware of the full form of ESOP – Employee Stock Ownership Plan. It is one of the most beneficial plans to employees as it provides employees part ownership in the company in the form of shares.
Concept of ESOP
An organisation provides ESOPs to its employees so they can purchase a certain number of company shares at a specific budget after the option period. Before any employee can exercise their option, they are required to undergo the predetermined vesting period, which suggests that the employee has to work for the organisation until a part or all of the stock choices may be exercised.
Employees are allowed to use their ESOPs to buy business stock at lower prices than the market value. They can also sell shares bought through ESOPs and profit from their investments. If the employee exits or retires before the vesting tenure, the corporation has to buy back the ESOP at a reasonable market value before 60 days.
Why do Companies Offer ESOPs to Employees?
If you just can’t figure out why organisations offer ESOPs to their employees. Well, companies mostly use employee stock ownership plans to draw in and hold on to high-quality employees. Companies usually give out the stocks in a phased manner. For example, a company may give its employees the stocks at the end of the financial year, which means allowing them to remain with the organisation for collecting that grant. Companies don’t only want their employees to stay back for a long time but also wish to make them stakeholders in their company. By this, it basically means the company is building employee work morale.
Benefits of ESOPs
Now that you know ESOPs and how they work, let’s look at the three significant advantages of ESOPs for employees. The table below has the benefits listed for you and your company:
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There’s no need for you to exercise your ESOPs right after the vesting period. For example, if Rs. 500 is the grant price per share and the current price is just Rs. 400, you could wait till the share price appreciates before exercising your ESOP. Fundamentally, you can time your investments so that the market price is higher than the grant price.
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ESOPs can benefit you by enlarging the equity exposure within your financial portfolio. Equity has been considered a good choice for investors who are willing to generate wealth for the future. When the shares you buy appreciate crucially over time, and then the procedure of forming generational wealth for your family tends to turn out much easier and quicker. |
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ESOPs tend to grant you a feeling of ownership and fellowship with the particular company you work in. This takes place as an employee has a direct connection to the company as they help its growth, which might result in the appreciation of its share’ worth. ESOPs assist you in profiting from this growth, which means letting you gain from all your hard work indirectly. |
Advantages of ESOPs for Employers
The company can benefit through this feature too, let’s find out how:
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ESOP also plays a role in compensation that tends to attract and keep hold of employees. Skilled employees will wish to continue, or join the company for this added benefit. |
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Employees who hold the ESOP should wait until the vesting period before exercising their ESOPs. Hence, this makes employee retention even more easier. |
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The opportunity of ownership in the company allows the employees to obtain profit from the company’s profits. It can lead to the capability of developing Productivity and, as a result, benefiting the company. |
Tax Implication of ESOPs
You should know that ESOPs have binary tax implications, the taxes will apply when:
- When the employees use their rights and purchase shares in the company.
- When the employee tends to sell the shares after purchasing them.
Let us understand these implications better:
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Employees could buy the shares after the vesting period at a rate lower than the Fair Market Value of the share as of that particular date. Thus, the distinctness between the FMV and the exercise price of the share is seen as a prerequisite in the employee’s hands and is taxed at his income tax slab rate. Regarding start-ups, the government has still made the tax implications on ESOPs less formal.
Start-up employees would not have the necessity to pay the tax on the gratuity in that specific year when they exercise the ESOP.
TDS on ESOP will be put off the following dates, which is early:
● Achievement in the completion of five years since the ESOP grant date. ● Date when the employee tends to sell the ESOP ● Date of leaving the company
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In case the employee sells those shares, the distinctness between the selling price of the share and the FMV on the particular date when the share was exercised will be subject to capital gains tax.
If the gains are received by selling the shares after twelve months of purchasing them, then a 10% tax will be applicable on gains higher than Rs 1 lakh; in case the shares are sold in less than twelve months, the profits will be taxed at the rate of 15%. |
Conclusion
ESOPs tend to offer several benefits to salaried employees. ESOPs permit an opportunity for developing wealth by increasing equity exposure in an individual’s financial portfolio, which may lead to long-term wealth growth. Therefore, ESOPs can be a valuable tool for employees to develop their economic well-being and line up their interests with the company’s interests.