How to save tax on ESOP: Employee Stock Ownership Plan (ESOP) is generally offered by firms as part of the compensation package
How to save tax on ESOPs: The Employee Stock Ownership Plan (ESOP) is generally offered by firms as part of the compensation package. With this, the employee receiving ESOPs becomes the owner of a part of the total stocks of the company at a low or no additional costs. Employees are also allowed to encash such ESOPs after a specified period.
In a rapidly growing company, encashing ESOPs can generate huge profits for employees. However, such profits are subject to tax.
The taxation on ESOPs normally happens twice: 1st time when they are issued/ exercised by the employees and 2nd time when they are sold in the open market, according to Archit Gupta, Founder & CEO, Clear (formerly ClearTax).
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Tax at the time of issue
According to Gupta, ESOPs are generally 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,” says Gupta.
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Taxed at the time of sale
At the time of sale, the incidence of tax happens depending on the period they have been held.
In case ESOPs 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.
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How to save taxes on ESOPs
Gupta suggests employees can purchase flats or 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, then the gains are taxed at slab rate and tax saving opportunities are similar to the salaried class of people, like 80C deduction, 80D deduction etc.
The tax-saving opportunities for employees at the time of the issue of ESOPs are the same as tax-saving options available to other salaried employees.
“The tax saving opportunities on them are similar to tax saving opportunities available for salaried class of people, like 80C deduction, 80D deduction etc. Tax on them are levied by the way of payroll deduction,” says Gupta.
