Employee Stock Ownership Plan

ESOP or Employee Stock Ownership Plan is an employee benefit plan that allocates ownership interest to the workers of the company. This takes place in the form of stock. It is formed to facilitate succession planning in a closely-held company. Esops are becoming increasingly popular in India, with several local and international companies doling out Esops to their employees.

Fired employees qualify for the amount vested by them in the ESOP. Companies give senior employees the benefit of holding more shares compared to new ones. It is setup as a trust fund. These shares can only be sold only at or after the time of retirement or termination.

In other words, Esops are the right/option given to eligible employees to buy equity shares of the company at a predetermined rate (mostly face value) within a stipulated time (exercise period).

Tax is levied at two points in Esops. First, at the time of exercise of the Esop. Second, at the time of selling the shares.

Exercise of Esop is taxed under the head salary (perquisite) where the difference between fair market value of the shares and exercise price of shares is taxed as per the normal tax slab of the employee.

The Budget 2020 amendment, however, said that from FY 2020-21, an employee receiving Esops from an eligible startup need not pay tax in the year of exercising the option.

Benefits of ESOP

1. It acts as a source of motivation for employees who will be benefiting when the prices of the company shares rise in the market.

2. It helps to retain employees in the organisation

3. Employees are benefited for the hard work they perform in trying times.

4. It helps in preventing a significant amount of cash outflow from the company.

A recnt research shows that companies such as Flipkart, Swiggy, PhonePe, Udaan, ShareChat, Razorpay, CRED, Browserstack, Meesho, Spinny, Zerodha, Unacademy, upGrad announced ESOP liquidity program worth more than $440 million. E-commerce major Flipkart, SaaS company Browserstack, digital payments platform PhonePe, edtech company upGrad, B2B e-commerce platform Udaan, social network platform ShareChat are the top buyers of ESOPs in the list.