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How Employee Stock Option Plan (ESOPs) Works For Employees & Company?

Companies plan various options for its employees for their engagement with the company. And one of the very good option is ESOP. Employee Stock Option Plan, ESOP is a plan under which the companies offer the shares to its employees. Mostly, it has been notices that ESOPs are contribution to the employees and they don’t have to purchase. But if they have to, the shares are offered generally at the discounted rates (though in some cases at the market value).

Benefits to the company:

This scheme helps the company to create the employees’ interest in the development of the company. As a stakeholder, they will be more inclined that the company must progress so that the market value increases. Also, the employees will be more loyal towards the company. This will also help in decreasing the attrition rate. Many a times the ESOPs is also used by the privately owned companies. The existing employees will help to create the customers of the company if they decide to go public later on.

This is more preferred by IT companies  in India. Also, ESOPs are widely used in US whereas it is still on the progressing stage in India. But before you are eligible to buy these shares, there is a condition. You must have the employee of the company for at least one year. Though the time period can be more for many companies. And you have to sell the shares back to the company before leaving. It might be at the market price or per company’s rules.

Offering ESOPs helps the company to generate the funds in the tax deductible form. The new shares issues or the selling of treasury shares will be tax deductible.

employee stock option plan

Benefits to the employees:

  • Employees get the shares at the discounted price or by the cash benefits.
  • There are certain tax benefits attached to it. You don’t have to pay the tax while buying. The tax is to be paid only at the time of sale or transfer. And the tax is to be paid in only short term capital gains and not in case of long term capital gains. Also, the dividends are tax deductible.
  • It is a good investment option so that employees can manage the portfolio easily.

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