Employee stock option plan: How to reduce your tax burden with ESOPs

 Employee stock option plan: How to reduce your tax burden with ESOPs

Any profit made through the sale of shares granted to a person under an employee stock option plan (ESOP) is subject to taxation in India under the category of "Capital Gains." An employee benefit plan is an ESOP.  An employee may purchase business equity at a discounted cost via the ESOP program. These benefits are offered to keep staff.

Taxes imposed on ESOPs

According to Mumbai-based tax and investment expert Balwant Jain, "When an staff member is allotted shares below its fair market value, any difference between fair market value and the price given is taxed as perquisite in the employee's hands."

Taxation on ESOP often takes place twice. Employees issue and exercise them the first time, and then they are sold on the open market the second time.

Taxation of ESOPs: Tax at the time of issuance

Employee stock ownership plans (ESOPs) are often given to workers for less money than the market value of the company's shares. "The variation between the market price and the exercise price is thought to be a prerequisite, which is taxed as salary in the account of the recipient," explained Archit Gupta, Founder and CEO of Clear.

According to Gupta, the tax-saving alternatives accessible to them are comparable to those offered to the salaried class of individuals, such as the 80C deduction, 80D deduction, etc.

Taxation of ESOPs: Sale-based tax

In case they are kept for a duration of more than 24 months (for shares of an Unlisted Company/ Foreign Company), they are recognized as long-term assets, and any profits flowing from their sale are deemed to be long-term capital gains, stated Founder and CEO, of Clear. 

Long-term capital gains (LTCG) are taxed in India in what ways?

After indexation, long-term capital gains are subject to a flat 20% tax. Profits from the sale of the shares within 24 months will be subject to short-term capital gains tax. The short-term capital gains are taxed at a slab rate that is appropriate to you and are regarded like ordinary income.

"The holding period shall start with the date of allotment of the shares and not upon the date of allotment of the ESOPs," said Balwant Jain.

How may ESOPs be taxed less?

Employees may buy apartments or build a home to qualify for a capital gains exemption under Section 54F, according to Clear CEO. Gains that are short-term, or held for less than 24 months, are taxed at a slab rate and are eligible for the same tax breaks as the salaried class, such as the 80C and 80D deductions.