Employee stock option plans or Esops give employees the choice to buy stocks in the company at a future date at a price that is determined at the time of granting the option. It, typically, forms part of the compensation package for employees. The advantage to the employee lies in the lower price at which they may be able to acquire the shares.
Under the Esop scheme, employees can exercise their option after a lock-in period. This is called vesting. The vesting may be on a particular date or over a period of time, say three years, with a portion of total options vesting each year.
Also Read: Share allotment date taken as Esop holding period
Employees may choose to exercise the option and acquire the shares or let it lapse. If they exercise it, the difference between the exercise price and the fair market value is treated and taxed as perquisite. There is a tax implication when the employee chooses to sell the shares too. The profit is treated as capital gains and taxed accordingly. The period of holding to determine whether the gains are short- or long-term is taken from the date of allotment of shares to the date of sale.