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What is ESOP ?

ESOP is short form of Employees Stock Option Plan. Under this plan, companies provides employees a
plan by which the employees get an option to acquire shares of their employer company over a period of
time at a reduced price or nil price. Therefore ESOP is primarily a kind of incentive to hold the employees to
the company's fold .Therefore, question of taxing this perquisite and capital gains at the time of sale of
shares received by the employees arise.

What is this vesting of shares?


Under ESOP , an employee is given an option of buying the share of companies at a reduced priced. The
Option is a Right but no obligation. Therefore , date of vesting of shares means
the date when the company allots shares to employee.

Let us take an example.

A company announces an ESOP plan under which company will allot 500 shares of company to certain
employees at a price of Rs 100. Those eligible employees will have option of getting allotment of 100 shares
on 1st day of October every year starting from 1/4/2007 for next five years.Let us say, Mr X an employee fills
out the ESOP application form on 1.7.2007 for allotment of shares . He is allotted 100 shares on 1/10/2007 .
The market value on 1/10/2007 , (vesting day) is RS 500. These 100 shares , let us think , hypothetically,
sold by the employee on 31/3/2009 at a price of RS 1200. Then

FBT to be paid by the employer company will be 33.99% on (Rs500-Rs 100)x 100 nos=Rs 16000.Since the
vesting date is 1/10/2007 ,FBT will be paid in the year of vesting i.e FY 2007-08 .

There will be long term capital gain on 31/3/2009 since the the shares allotted on 1/10/2007 are hold for
more than one year. The long term capital gains shall be computed as under

Sale consideration RS 1200 x 100 = Rs 1,20,000


Less
Cost of acquisition is FMV for FBT purpose i.e Rs 500x 100 =Rs 50,000
Long Term Capital Gains = Rs 70,000

Conditions as under

(2) Any such Plan or Scheme shall be incorporated in a written document specifying,
the following, namely:-

i) The total number of shares that may be issued under such plan or scheme.
ii) The class of employees who would be entitled to participate in such plan or scheme.
iii) The pricing formula on the basis of which shares would be allotted to the employees, including the price
at which such shares are offered at the time
of grant or exercise of option.
iv) The number of shares or stock equivalent which would be issued to any employee or classes of
employees and the basis of such award, if any.
v) The period by and the manner in which the approval of shareholders would be obtained.
vi) The lock in period of such shares from the date of option or exercise of option or purchase of shares
under such scheme or plan, as the case may
be.
vii) If the shares are unlisted, the basis of valuation of shares with reference to
the company’s account for the last three financial years and a brief explanation as to how the basis was
arrived at.
viii) The conditions relating to restriction on non-transferability of such shares.

Provided that the conditions contained in the written document shall not be changed after the date
the scheme or plan comes into effect.