Employee stock option is
a profitable plan which is created in favour of employees in order to benefit
them with maximum returns. In this plan, an employee enjoys the right to
acquire the company’s share.
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Other Type of Incentives -
ESPP (Employee
Stock Purchase Plan):
In this scheme, after a certain tenure/period of time, the company,
offers its shares to its employees at a discounted price which is generally
10-15% less than the market price.
Stock Appreciation Rights:
In this scheme, the
company offers its employees a compensation of an amount equal to the
appreciation value of the share in a predetermined time
RSU (Restricted Stock Units):
In this scheme, the
company offers its shares to their employee on the basis of their compensation
letter but along with some restrictions and limits
Phantom
Shares – Phantom stock is a form of long-term deferred compensation
using the Company shares as the measuring device for calculating the value of
the deferred compensation. It simulates the Company shares in everything except
that does not represent true ownership.
RSA
- Restricted Stock Award
Few Terminologies related to ESOP:
●
Grant an option: This is an option
where a company offers a right to its employee to buy the company’s shares.
●
Grant
Date: It is a date on which the employee
receives the ESOP option
●
Vesting
Date: It is a date on which the
employee becomes entitled to exercise the options
●
Vesting Period: The period between
vesting date and Grant date.
●
Exercise: Initially, the company offers a
grant an option to its employees where an employee is free to convert its
option into shares. This is known as Exercising the option
● Exercise price: This is the price at which the shares
are offered to its employees. This price is usually less than the current
market price. It is also known as Strike price.
●
Exercise Period: This is the period
where an employee gets a chance to exercise its share. This is known as
Exercise period
●
Fair
Market Value: The market value of shares during its allotment
period is known as Fair market value.
How can we calculate the tax on ESOPs?
There are two stages of tax calculation on the shares allotted as
ESOPs:
1st Stage- When an employee exercises their options
after the vesting period
2nd Stage- When the employees sell their allotted
shares
Tax Implication after the option is exercised:
When the options are exercised under the ESOPs, then the tax is
levied on the perquisite value (Perquisite value= FMV-Exercise Price).
If the shares get listed in India, then the value of the allotted
shares are calculated on the basis of average price (average of highest and
lowest price). If the shares are unlisted then FMV is calculated on the basis
of the valuation certificate issued by the merchant banker and the valuation
certificate should not be more than 180 days of the exercise date.
Even if the company is listed outside India, it has to take the valuation certificate from the merchant bank because the shares listed in abroad are treated as unlisted share for the ESOP purpose.
Want to contact Planify
for more information about ESOP
–
EMAIL- help@planify.in Call at - +91-70-6556-0002
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