Understanding ESOPs for Indian employees
Indian startups and big companies love Employee Stock Option Plans (ESOPs). They give you a piece of the company you work for. This story breaks down ESOPs for Indian employees, explaining how they work, why they're beneficial, and what you need to keep in mind. The idea is to make you feel more invested in the success of the company.
What are ESOPs?
ESOPs give employees the option to purchase company shares at a predetermined price after a certain vesting period. This price is typically lower than the market value, providing financial benefits if the company's stock price increases. For example, if you have an option to buy shares at ₹500 each, you would make a profit if the market price goes up to ₹1,000 per share.
The vesting period explained
The vesting period is a stipulated time employees must wait before purchasing shares. This period typically spans one to four years, serving as a mechanism to reward committed employees. For instance, if an employee is granted 1,000 options with a four-year vesting schedule, 25% of these options will vest each year. After the first year, they can buy up to 250 shares at the predetermined price.
Tax implications of ESOPs
In India, ESOPs are subject to taxation at two points. At the time of exercising options, the difference between the exercise price and fair market value is considered a perquisite and is taxed accordingly. When you sell those shares, any gain/profit is considered capital gain and taxed accordingly. If you hold the share for more than 24 months, it's long term capital gain, else short term.
Making smart choices with ESOPs
While ESOPs present opportunities for significant financial gains, employees need to make informed decisions to maximize their benefits. They should consider the vesting periods and the potential growth of their company before deciding to exercise options or sell shares immediately after vesting. It is also wise to diversify investments and not hold all your financial resources in company stocks, no matter how well the company is doing.
