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Employee Stock Option Plan

Employee Stock Option Plan:

A parliamentary panel recently recommended to the government to amend the Income Tax Act to ensure that ESOPs (Employee Stock Option Plan) are taxed only at the time of sale of shares and not on notional gains to allow startups to hire ‘low-cost’ employees.

  • Employee Stock Option Plan (ESOP) which is also called Employee Stock Ownership Plan in India is a benefit plan that offers employees the right to buy company shares at a predetermined price.
  • It’s a tool companies use to attract, retain, and reward employees.
  • ESOPs help to align employees’ interests with the company’s growth and success.
  • Under an ESOP, eligible employees are granted the right, but not the obligation, to purchase company shares at a predetermined price, known as the “exercise price” or “strike price.”
  • This price is typically set at a discount to the current market price of the company’s shares.
  • Employees have to wait for a certain time period – known as the vesting period– before they can exercise the right to purchase those specified number of shares.
  • All companies other than listed companies should issue it in accordance with the provisions of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014.
  • In the case of listed companies, they should issue in accordance with the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines.