Employee Stock Option Plan
Author: – Ms. Shilpa Agarwal
In this article, we will try to explain In brief how ESOP works.
As per Sec.2(37) of the Companies Act, 2013, ESOP means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price;
But does not include the following categories of employees:
The above two exclusions do not apply to a registered start-up for 10 years from the date of its incorporation or registration.
ESOP has the following stages during its lifecycle:
We need to understand the Taxation aspect of the issue and exercise options from the Employer and Employee perspective.
To the Employee, there is no tax on issue or exercise of options. Options cost shall be accounted for as compensation expense and allowed as a deduction in the Profit & Loss Account
To the Employee, there is taxation at two stages:
The difference between the fair value on the date of exercise and the exercise price is treated as perquisites and added to the salary of the employee. Tax is deducted on the same by the Employer.
As per Finance Act, 2022, eligible Start-ups are allowed to defer the deduction of TDS on the “Perquisite” component pertaining to ESOP added to salary for 14 days from the earlier of the following:
When the employee sells shares acquired pursuant to the exercise of options, capital gains shall be levied, short-term or long-term depending on the period of holding. For this, the cost of acquisition shall be taken as the fair value on the date of exercise and not the actual exercise price to avoid double taxation.