Employee stock purchase scheme

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Companies often reward their employees with their stock, either in the form of employee stock option plans Esops or employee stock purchase plans ESPPs. If the employee does not exercise the option within a time prescribed by the company, the option automatically expires.

ESPPs allow employees to use their salary to purchase the stock of the company, usually at a discounted price. Unlike Esops, ESPP holders do not have any option, but are mandated to pay the exercise price usually by way of monthly deductions from their salary.

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Employees can realise the benefit by selling the shares in the market, subject to a lock-in period, which starts from the date of the grant for Esops and, for ESPPs, from the date of allotment of shares. While the minimum lock-in period for listed shares is one year, a company may choose to extend it.

At the time of receiving the shares. The value of the shares after deducting the price paid by the employees is taxed as salary income at normal tax rates. In case of Indian listed shares, the value for tax purposes is based on the traded price in the stock market on exercise , and, in other cases, it is left to the discretion of the prescribed valuer.

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On holding the shares. At the time of sale.

Any gain beyond tax value of the shares may be subject to capital gains tax, depending on whether the shares are listed in India and the period of share holding.

For listed shares where the securities transaction tax is paid, there would be no tax if shares are held for more than one year, but taxed at In case of unlisted shares, the tax rate is For ESPP holders, on the other hand, the average price would increase with each subsequent allotment.

Esop holders are also protected from the downside by providing them the option of opting out when the expected market price is less than the exercise price.

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