What Is an ESOP
ESOP is a taxable employee benefit program. This means the profits realized from them are taxable. It is also called Employee Stock option program, where in at some point of time an employee of an organization is given an option to buy stocks of the company. It is a very flexible financial document which utilizes tax deductibles to achieve corporate goals and objectives.
The employees are given an option to purchase the shares of the company either at the prevailing market price or sometimes even at a price lower than the market price. But there is certain case where the company has not yet listed its shares in the stock exchange, and then the employees might have to purchase the shares as decided by the management. Usually this is one of the techniques the company uses to retain its employees and to motivate them towards productivity. Because when an employee opts for this plan it is as good as he or she is one of the stake holders and is qualified for profit sharing.
Let’s discuss when a company can give this option to its employees? Usually this depends on the company policy and the designation of employees to whom this option can be given. Generally there is a time limit to reward this program. The company may for example in its policy state that the vesting period would be when an employee completes one year of employment in the company. This period usually will range from one to five years. In between if an employee quits his or her stock option program breaks. Similarly a company may also issue this program in a phased manner that is percentage wise division 10% in the first year, another 10% in the next year and so on till 5 years.
The ESOP of an employee is taxable, but it is taxed only the profits he or she receives. Profit here means when an employee sells them or transfers them. Transfer means when he or she gifts it to some one else under a permanent deed which says that the former has no ownership of the stocks any more. The amount that is taxed will be under the heading Capital Gains, which are of two types. Short term which means when he or she sells the share within a period of one year from the date of purchase of the shares and it is referred to as long term gains when it is sold after a period of one year.