For workers, Employee Stock Ownership Plans, or ESOP ‘s, are a popular incentive because they allow them to own a portion of the firm at a pre-determined price, known as the “exercise price,” at some point in the future.
Employees must wait until the end of their “vesting term” before they may purchase or exercise their shares. Even while they seem to be a good deal for workers, the tax implications of taking advantage of this perk should not be underestimated.
First, let’s observe how ESOP ‘s are used
Suppose the corporation gives an employee 100 shares on April 1, 2022, with an exercise price per share of Rs. 100. Let’s suppose that the two-year vesting term is used. After April 1, 2024, he will be able to purchase the shares for Rs 100 each.
To generate money, he may sell the shares on August 1, 2024, for Rs 200. However, if the market price is Rs 60, he does not need to take advantage of the option. Instead, he may sit back and watch as the stock price increases.
In what way are employee stock ownership plans taxed? Employee stock ownership plans (ESOPs) are taxed in two ways when they are held by an employee. First, when the options are used, and then, when the stock is sold.
Initially, it is considered a perk and is subject to income tax as a result. After being sold on the open market, it is considered a capital gain. Employees who get an ESOP allocation are taxed on the amount they receive as a condition of their employment, and that amount is included in their salary.
To calculate the perquisite value, which must be taxed, you subtract the fair market value (FMV) of the shares allocated from the money you collected from the employee. Nanghia Andersen LLP partner Neeraj Agarwala made the comments.
The important thing to remember is that the employee will have to pay capital gains tax on any future sales of his or her shares. However, the cost of the shares sold would be the FMV, taken into account for perquisite tax in determining capital gains.
Because of this, the same earnings are not taxed twice. Agarwala was the last to speak. What is the tax treatment of listed vs. unlisted stocks? A perquisite tax expert believes that there isn’t much of a difference.
Unlisted shares must have a fair market value established by the merchant banker, but listed shares are taxed based on the trading price on a stock exchange.
A key consideration is when you’ll be required to pay taxes
ESOPs are taxed in the year that the options are exercised, and the taxes must be paid in that year as well. Additional time has been granted for depositing the ESOP in cases of start-ups.
Employees have four years from the date the shares are allocated, or the date the shares are sold if they are sold, or the date the employee is no longer employed by that firm, whichever comes first, to meet their tax obligations under the Employee Stock Purchase Plan. “Agarwala explained this to me.
Employee stock ownership plans (ESOPs) have a vesting time before they are transferred to workers. It’s not for you if you’re seeking a quick injection of cash, however. If you are searching for short-term cash, an ESOP may not be the best option.
Furthermore, exercising the options makes sense only if the stock’s market value exceeds the grant price. In the event you decide to exercise your stock option, you will be subject to a capital gains tax on the difference between what you paid for it and what the stock is now worth. ” Neha Nagar, founder and CEO of TaxationHelp.in, says so.
Published by – Kiruthiga K
Edited by – Kritika Kashyap