ESOP in India-Example of ESOP-How are ESOP Shares Allocated-Pros Cons ESOP-Tax Implications on ESOP

ESOP in India – Meaning, Examples, Advantages, Disadvantages

Employees of businesses today enjoy more than just basic benefits. Employees increasingly receive more than simply a paycheck. Employee Stock Ownership Plan. Let us look into what is ESOP in India along with examples, advantages and disadvantages in this topic.

During a financial plan review, one of our clients revealed his ESOP in India. We were doing some math when our eyes burst out. His benefits would exceed 20% of his net worth if he continued at this rate (after adjusting for cost and all applicable taxes).

What is ESOP?

ESOP referred to as an Employee Stock Ownership Plan. Companies provide employees free or low-cost shares that they can resell at a certain price. Flipkart, Myntra, and other small businesses in India provide ESOPs.

How Does ESOP Work?

Employers decide how many ESOP shares to sell, how much to charge for them, and who receives them. Then there are ESOPs and a grant date.

An ESOP is held in a trust fund for a time period known as the vesting period. Following that, the ESOPs can be sold. Employees must work for the company for the stipulated period of time in order to use the ESOP and receive a portion of the firm’s profits.

Employees can use their ESOPs after the vesting period is up. The vesting period concludes on the vesting date, and the funds are yours. Employees can use their ESOPs to purchase business shares at a discount to its market value. Employees can potentially profit from the sale of ESOP shares.

If an employee leaves or retires before the ESOP vests, the ESOP must be returned within 60 days at fair market value.

Example of ESOP in India

Companies understand the importance of investment in business. Let us understand this with an example of ESOP in India. Employees are unwilling to take chances. He wants to get a good price on his stock option. It pays to sell stocks at the right time. If an employee is given 300 shares at Rs. 100 each, the employee may decide to purchase them after one year.

When the market value exceeds Rs.100, it is advantageous for the employee to exercise the option. Regardless of the current share price. Buy for Rs. 30000 and sell for Rs. 45000. It is (150 x 300). He will receive Rs. 15000. You must pay 30% perquisite tax and 15% short-term capital gain tax, or $4,500 and $2,250, respectively. Still, a net gain of $8,250 is a good result.

Employees are not charged because they only pay when they utilise it. They can buy shares at a high price and profit handsomely. They may also decline the ESOPs. Employees profit from an ESOP by boosting their income. Employee stock ownership programmes help companies in many ways.

Pros / Advantages of ESOP in India

ESOPs can be useful in the long run. When Infosys was small, numerous employees were given ESOPs so they could be adequately compensated. Shareholders in a successful firm profited by selling their equity on the stock exchange. Investors can purchase equity through ESOPs.

When you work for a company, you will be kept up to date on the company’s current and future ambitions. All decisions must be taken, including when to exercise the option and when to sell the ESOPs. Let us look at the pros / advantages of ESOP in India.

Retaining Staff is Critical

Employees who had to wait for their ESOPs to completely vest are more likely to stay put. Productivity increased. Employee stock options (ESOPs) allow employees to share in the earnings of the company.

Purchase Low-priced Stock

Employees who use their ESOPs typically pay a small fee to purchase their shares. As a result of their amazing deal, they can acquire stock at a discount.

Dividend Income

Dividends are paid to shareholders from a portion of the company’s profits. Employees can benefit directly from their efforts to increase the company’s success.

Ownership of Stock

Employee stock ownership plans (ESOPs) provide employees with the opportunity to acquire a portion of the company’s equity.

A Method for Recruiting Talent

It can assist organisations in locating and retaining qualified employees. Indeed, ESOPs help start-ups attract top people when high-paying jobs aren’t practical.

Cons / Disadvantages of ESOP in India

When a company’s cash reserves are depleted, it may issue its employees ESOPs. Let me tell you the major cons or disavantages of ESOPs in India.

Some people are afraid of taking risks. ESOPs might not be the best choice. Employees do not always benefit from ESOPs, and they often receive little or nothing in return. Because they have so many restrictions, ESOPs aren’t the best option if you need money. Tax consequences must also be thoroughly investigated. For every Infosys, ten other companies suffered losses as a result of ESOPs.

What are the Tax Implications on ESOP in India?

If the corporation grants options, there is no tax. When the options are sold, there is no tax. The employee’s “perquisite” in this case is the difference between the market and exercise pricing.

When an employee sells his or her stock, he or she realises a capital gain. If the shares are sold within a year, they will be subject to the same 15% capital gains tax as any other share purchase or sale. Because this is a long-term investment, there is no tax if the stock is sold after a year.

Short-term capital gains are added to income when an employee in India sells shares in a company that is publicly listed outside of India. The employee’s earnings are taxed. Long-term gains must be taxed at a rate of 10% without indexation or 20% with indexation.

What Happens to ESOPs when the Company is Listed?

Unlisted companies have difficulty selling ESOP shares since there are few buyers and the FMV is determined by merchant bankers. Capital gains and debt funds are taxed in the same way. Short-term capital gains will be taxed on stocks sold within 36 months after exercise.

The gains are subject to taxation at your marginal rate. Long-term profits (more than 36 months) are taxed at 20% + inflation. Employees will have more opportunities to sell their shares if the company is publicly traded. Changes in the market also have an impact on the FMV.


Investigate Employee Stock Ownership Plans, including its benefits and tax implications. Keep in mind that ESOP in India must be vested before they may be used. To get the most out of them, you must fully comprehend them.