Employee Stock Option or Equity incentive plan, more generally known as ESOP, is yet another employee benefit tool tendered as stock options by the employer to a permanent employee basis their performance. With this option in hand, employees of a company are entitled to acquire stocks of their employer organization at a predetermined lower price or no price over a time period.
Issuance of ESOP is generally aimed at retaining competent workforce and increase their motivation for considering long term of service with the employer. Also, ESOPs offered to an employee tend to inculcate a sense of ownership in the employee with regard to its employer company. At present, ESOP issuance is predominantly practiced by Indian IT companies, wherein human capital is the main asset.
ESOPs and Employees
To the employees, ESOPs prove to be a retirement benefit plan. Also, the main advantage that accrues to the employees with ESOPs is that as the exercise price of the stock option is fixed for a certain time period. The employees could exercise the option at their discretion taking the advantage of the market forces, when the market price increases substantially in comparison to the exercise price.
Income tax implications for employees with ESOPs:
ESOPs attract tax as is fundamental to any other financial instrument. Employees with ESOPs would be required to only pay capital gains tax on the sale of ESOPs.
ESOPs and Issuing Company
As per the Times of India report, Bangalore Income-tax appellate tribunal (ITAT) after considering the case of Biocon, a Bangalore-based bio-tech major, ruled that discounts provided to employees under ESOPs qualify for cost associated with employees and issuing companies should be provided tax breaks for such discounts. Further, in this context the bench stated that the issue of ESOPs in India is primarily targeted at employee retention and does not aims at raising share capital.
Income tax implication for Employers/Issuing Company:
Until recently, the employees were liable to pay perquisite tax on the difference between the cost at which the company's stocks were issued to them and the market price of the stock at the date of issue. However with an exemption to pay perquisite tax, employers or ESOPs issuing companies are no longer required to deduct tax from the salary of the employees as TDS.
Further, as per the new ruling, companies can get a tax holiday for the issuance of ESOPs as the cost involved would be accounted for as employee expense.
ESOPs in foreign context:
In the foreign context, ESOPs are generally opted for by the employees, in case the promoter or owner of the stocks is relinquishing charge. This way, the different corporate in foreign nations, utilize ESOPs for corporate financing activities such as financing expansion plans, acquisition, spin-off and other such activities.