Hi Nisha,
Please find below the comprehensive details about ESOPs.
What are ESOPs?
ESOPs are stocks of a company offered to an employee either at the time of joining or when such a plan is introduced. The offer or option to buy is usually valid for a fixed period, known as the vesting period, and can either be exercised in phases during the period or at the end of it. The price the employee has to pay is usually less than the market price. That is what makes an ESOP attractive.
Why ESOPs?
Tech companies were the early starters of ESOPs; now several industries have embraced this practice.
ESOPs are usually used to control attrition. At the time the offer is made, you only have to agree to the schedule and the price and usually don't have to buy anything. Depending on the schedule, a part of your stock option actually becomes yours, whether it is every year or once in a couple of years.
Stock options for employees
Different companies have different reasons for offering ESOPs. If the company wants to reward employees for achievements, the vesting period could be short. The following are some of the common ways in which listed companies reward their employees with stock.
If you are being offered ESOPs by an unlisted company, it could be a risk. So be sure to get an exact stock valuation first.
Graded vesting:
This is annual vesting over a period and is the most common way of giving ESOPs. For instance, Air Deccan has offered ESOPs with vestments of 15 percent, 30 percent, and 40 percent over four years. "Even if someone leaves before the end of the vesting period, he can still exercise part of the option." This is usually done to retain employees.
Performance-linked graded vesting:
This is the route taken by companies that not only want employees to stay but to work better. Here, the percentage of shares allotted depends on the performance of the employee.
Bullet vesting:
In this case, the entire allotment is made at the end of the vesting period.
Employee stock purchase schemes:
Employees are offered their company's stock, usually at market price, by paying for it out of his salary over a three- to 27-month 'offering period.' This could be risky if the stock price tanks.
Taxation of ESOPs
Stock options can be taxed in two stages:
Pre-sales
Not applicable to listed companies selling shares according to Sebi guidelines. Stock options are taxed in unlisted companies. It applies from the date the company allots shares to its employees.
Pre-sale tax
Prevailing share price: Rs 2,000
Exercise share price: Rs 1,800
Perquisite: Rs 200
Perquisites added to income, tax deducted at source.
This is when an employee sells the stocks bought through an ESOP. The date of allotment of shares, after the employee buys it, is important. If a company goes for a public offer after an ESOP, for taxation, the status at the time of sale of ESOPs will be taken.
Post-sales
Post-sale tax
This is when an employee sells the stocks bought through an ESOP. The date of allotment of shares, after the employee buys it, is important. If a company goes for a public offer after an ESOP, for taxation, the status at the time of sale of ESOPs will be taken.
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KATYANA