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Business News/ Money / Personal Finance/  Employee stock option plan: How to save taxes on ESOPs— explained
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Employee stock option plan: How to save taxes on ESOPs— explained

Under the employee stock option plan (ESOP) scheme, an employee gets the company’s stock at a low cost. These are perks provided in order to retain employees

The taxation on ESOP normally happens twice. (Pixabay)Premium
The taxation on ESOP normally happens twice. (Pixabay)

Any profit arising on the sale of shares allotted to an individual under the employee stock option plan (ESOP)is taxed under the head ‘Capital Gains’ in India. ESOP is an employee benefit plan.  Under the ESOP scheme, an employee gets the company’s stock at a low cost. These are perks provided in order to retain employees.

Taxation on ESOPs

“When an employee is allotted shares below its fair market value, the difference between fair market value and the price paid is taxed as perquisite in the hands of the employee," said Mumbai-based tax and investment expert Balwant Jain.

The taxation on ESOP normally happens twice. The first time is when they are issued/ exercised by the employees and the second time is when they are sold in the open market.

ESOPs taxation: Tax at the time of issue

Normally ESOPs are issued to the employees at a lesser price than the market price of the shares of the concerned company. “The difference between the market price and the exercise price is considered to be a prerequisite, which is taxed as salary in the hands of the recipient," said Archit Gupta, Founder and CEO, of Clear.

The tax saving opportunities on them are similar to tax saving opportunities available for salaried class of people, like 80C deduction, 80D deduction, etc., Gupta added.

ESOPs taxation: Tax at the time of sale

In case they are held for a period of more than 24 months (for shares of an Unlisted Company/ Foreign Company), they are treated as long-term assets, and any gains coming from their sale are considered to be long-term capital gains, said Founder and CEO, of Clear. 

How are long-term capital gains (LTCG) taxed in India?

Long-term capital gains are taxed at a flat 20% after indexation. If the shares are sold within 24 months, the profits shall be taxed as short-term capital gains. The short-term capital gains are treated like your regular income and get taxed at a slab rate applicable to you.

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

How to save taxes on ESOPs?

According to Clear CEO, employees can purchase flats/ construct a house to get an exemption on the capital gains under Section 54F. In case the gains are short term, i.e. held for a period not more than 24 months the gains are taxed at slab rate and tax saving opportunities are similar to salaried class of people, like 80C deduction, 80D deduction, etc.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

 

 

 

 

 

 

 

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ABOUT THE AUTHOR
Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Published: 10 Oct 2023, 12:24 PM IST
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