You must have heard stories of crorepati employees of Infosys or some other big organisation — I am talking about 10 years back when salaries were comparatively low. ESOPs are Employee Stock Option Plans — few call them Employee Stock Ownership Plans in India. ESOPs also help in retaining employees. So today an employee may get shares which would be given in sets of over a period of time. Usually employees have to wait for a certain duration to exercise their right to buy shares.
This period is called vesting period. If the employee does not exercise the option of buying the shares within the vesting period, the options lapse and the employee does not get any rights. IT firms had started this trend but now many companies in different sectors give ESOPs to employees — even the startups are depending on ESOP to attract talent.
An employee can create wealth from ESOPs if the timing luck is right and the company does well. ESOPs should be exercised when the ESOP value is at a lower price than the market value of the shares on that day.
ESOP gain but Zero Risk Strategy. It is advantageous if the employee exercises the option when the market value is greater than Rs. Suppose the market value is Rs. He can make a profit of Rs. If the market price of the shares is high, they can take the shares and sell getting high profits. They have the option to not take the ESOPs as well. Read — 15 types of risk that affect your investments. The company can preserve cash and dilute ownership if required.
The company benefits by giving ESOPs to employees.
ESOPs in India - Benefits, Tips, Taxation & Calculator
Employees benefit from the increase in the share price, so they will focus on working towards making the company successful. ESOPs can be of great value in the long run. For example, when Infosys was really small, it gave a lot of ESOPs to the employees. They all benefitted when it became such a successful company by selling the shares in the market. ESOPs are one of the ways to participate in equities. As an employee, you will know how the company is doing and its growth plans.
You can accordingly decide your investment strategy in ESOPs like if you should exercise the option, when to exercise the option and when to sell. Companies can give ESOPs to employees when they are short on cash as an incentive.
Employees will be more focussed on delivering results as they have a stake in the company. ESOPs may not be suitable for people who do not want to take risk. Sometimes ESOPs may backfire resulting in very less or no value for the employee.
If you want liquidity, ESOPs are not the best option as there are many rules regarding when to exercise your options.
There are also tax implications which should be considered carefully. In one of my earlier post I talked about ESOP —. WHY do we make financial mistakes. Most of the employees who get ESOP or ESPP benefits hold these stocks close to their heart.
And in most of the cases I have seen that with time these stocks become their biggest financial asset or biggest equity assets. But I have to ask these people:. If the stock is sold after 1 year, there is no tax as it is considered as long-term.
ESOP Tax Calculator — Download. Employee Stock Purchase Scheme ESPS allows employees to buy shares at some discount decided by the company as compared to the market price. Shares can be bought by employees via monthly deductions from their salary. Restrictive Stock Units RSUs — When the employer gives RSUs, the employee gets the shares free of cost provided some conditions are met like a vesting period, employment time-frame etc.
RSUs are gaining popularity in recent times. Hope this article clarifies your douts about ESOP Plan.
Getting ESOP as salary package? Know about ESOP Taxation
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Notify me of follow-up comments by email. Notify me of new posts by email. Site designed by ThesisCustomizationservice. Read — 15 types of risk that affect your investments How do ESOPs help the company? But I have to ask these people: Is this your company the best stock available in the market?
ESOP (Employee Stock Ownership Plan) Facts
What will happen if your company starts underperforming — you will see tough times in your job as well as your stocks will underperform? And the worst case — what will happen if your company becomes next Satyam or Enron? What are the tax implications on ESOPs? More from my site How to select a Stock for Investment A picture that explains Equity as Long Term Asset What is equity? Subscribe for TFL Weekly Guide Do you believe in - An apple a day keeps the doctor away?
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