Know everything about Employee Stock Option Plan (ESOP)

Last Updated On: Jan. 6, 2022, 11:45 p.m.



ESOP (Employee stock ownership plan) refers to an employee benefit plan. This benefit which offers employees an ownership interest in the organization. Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail of these options. However, Employee stock ownership plans are just options that could be purchased at a specified price before the exercise date.


Definition of Employee?

An employee can be a person who is:-

  • A permanent employee of that organization.
  • A director of that organization.
  • Employees of a subsidiary of that Company.

However, employees do not include, Any employee(s) who was or is a promoter or an employee(s) of the promoter group. Further, any director who (directly or indirectly ) owned more than 10% of the equity shares of the organization.

The ESOP scheme can be provided by the Company through two ways:

  • Equity Route
  • Trust Route

Let’s get to know about Equity Route, the equity shares are being issued to existing employees when they exercise this option.

Trust Route:

Under this route, an Employee Welfare Trust is being formed by the Company for the administration of ESOP. Company issue scrips to this trust which ultimately transferred to the employee whenever they exercise this option.

what are the procedures that are to be followed to formulate ESOPs through equity route:

Step 1- The first step involved is to Constitute a Compensation committee.

Provisions with regard to the formation of the Compensation Committee are contained under Section 5 of the aforesaid guidelines. It is to be formulated by the Board of Directors of the Company having Independent directors in the majority. The committee is responsible for the formulation of rules and regulations of ESOP.

Step 2- Preparation of Plan

After that, the Compensation Committee shall form a plan in accordance with the guidelines as notified.

Step 3- Approval form the Board 

Once the plan is prepared, the compensation committee shall take the approval from the Board and in case the said Company is listed, the said plan shall also requiring permission from the stock exchange as well.

Step 4- Approval of Shareholders

A special resolution shall be required to take approval form the shareholder of the Company. 3/4 of the shareholders shall approve the said plan.


Lock-in period

The maximum period is 1 year and employees cannot enjoy such benefits as of shareholders until the option is exercised.


What is the TDS Liability?

ESOPs is split into two components:

i. Tax on perquisite as income from salary at the time of exercise.

ii. Tax on income from capital gain at the time of sale.

The tax on perquisite is required to be paid at the time of exercising of option which may lead to cash flow problem as this benefit of ESOP is in kind.


When is tax deducted?

Eligible start-up is require to deduct tax on issue of ESOP, within 14 days from:

(i) after the expiry of forty eight months from the end of the relevant assessment year; or

(ii) from the date of the sale of such specified security or sweat equity share by the employee; or

(iii) from the date of which the assessee ceases to be the employee of the company;


What is Rate of TDS Deducted?

Rate of TDS shall be rate in force for financial year in which such shares are allotted to employee.





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