What Is ESOP Employee Stock Ownership Plan Explained

Tax Implications of ESOP
• ESOPs are covered various tax implications as follows:
➔ Exercise Tax
When the employee chooses to exercise their Employee Stock Ownership Plan and buy the share, they
are required to pay tax on the difference between the ‘exercise price’ and the ‘fair market value (FMV)’
or market value of the share at the time of exercise. This tax is calculated as per the employee’s
income tax slab rate. The fair market value or the market price of the shares are decided by various
factors.
➔ Capital Gains Tax
If the employee sells the ESOP shares, then capital gains tax is applicable. Hence, the employee will
have to pay the short-term capital gains taxes, depending on the holding period of the shares. If the
employee sells beyond a span of 12 months after the initial purchase, a 10% capital gain tax would be
applied over gains of ₹1 lakh. On the other hand, if the shares are sold within a year, the gains are
subjected to a tax rate of 15%.
➔ Dividend Tax
If the organization is paying dividends on the shares held by their staff member, it is taxable as per
the applicable tax rates. While the dividends are taxable, the employee is still able to reap the profits
of the company by holding the shares allocated to them.