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Employee Stock Option Plan in India

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Attracting, Rewarding and Motivating a talented employee is the main purpose of Employee Stock Option Plan (ESOP). In order to retain the human capital, companies in India are investing a lot of money these days. One such medium is to motivate the employee with the help of ESOP.

Under this scheme, an alternative is given to the employee to acquire shares of the company. These shares are known as stock options and are granted by the employer based on the performance of the employee. Companies offer shares as an employee benefit and as a deferred compensation.

As per the guidelines of SEBI, an employee should be a permanent employee residing in India or outside India. It also includes the director of the company; he can or cannot be a whole time director.


The basic idea to give employee stock options in early days was to save cash compensations. It was a way to motivate the employee and even to save cash reimbursements for some of the cash strapped companies. These plans are over and above the salary of the employee but not in monetary form directly. Later, the concept of motivation picked up and retention led to spread of ESOP across company verticals.

Vesting Period:

This is basically the lock in period for the employee. It is a set date on which the stock option can be exercised.

For Example: Mr Deepak has been given a stock option from his company for a vesting period of 3 years in the year 2 February 2012. This means that vesting date is 2 February 2015. The price at which 500 shares were offered to Mr Deepak was Rs 250 each. This price is the vesting price. This means that on 2 February, 2015 he can exercise his right to purchase the share, depending on the conditions.

Let’s say, the price of share on 2nd Feb, 2015 is 650, this will result in a gain of Rs 400 each, which garners a profit of Rs 2,00,000 to the employee, if he exercises the option after 3 years.

Tax implication of Stock Option Plans:

Until 1995, there was no provision to tax ESOP. But, in that year, Income Tax Authorities clarified with the help of a circular that these options which make the shares of company available to employees at lower than market price will attract taxes. First and foremost thing is the discretion of the employee. Exercising of stock option or its rejection is totally dependent on the employee. ESOP benefits form a part of employee salary and are taxable as a perquisite. The calculation is based on the Market Value of share at the date of exercising of option and the vested price. Ordinary residents are liable to pay these taxes on the basis of global income.

For Companies Listed In India:

For all the companies listed in India, 15 percent of the tax is charged under Short Term Capital Gains. Long Term Capital Gain Tax (LTCG) doesn’t arise in this case.

For Companies Listed Outside India:

For the companies those are not listed in India but listed in other exchanges across the globe, the Short Term Capital Gain will be added as a part of salary and tax is charged based on the salary slabs.

LTCG charged is 20 percent along with indexation.

Take another example:

Employer has given the option of allotment of total 400 shares, for the next 4 years, for all eligible employees. The vesting price is Rs 100 and starting date of allotment is 1 July 2010. Mr Raj, one of the company employees is allotted 100 shares on 1 July 2010, at the vesting date the price of share is Rs 500. He sells these shares at Rs 1500 on 1 December 2011.

TAX At the time of Allotment of Stock Option:

STCG will be (500-100) * 100 * 20% = Rs 8000 (Considering Mr Raj is in 20 percent bracket).

TAX At the time of Sale:

(1500-500)*100*15% = Rs 15000

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