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ESOP- Tax AspectEmployees of Indian software companies are now eligible even for dollar denominated stocks under ADR/GDR linked stock options. Indian companies are now finding it difficult to retain their best of employees. After spending so much time & efforts on recruitment & training of each employee particularly in Software industry, certainly company ensures that an employee stays at least for some years. So Employees Stock Option Plan is the right answer. Employees Stock Option Plan is a new way to attract and retain MOST WANTED employees. This scheme has been there since long time. In the last budget Govt. has issued taxation guideline on ESOP. For employee ESOP becomes an incentive to put maximum effort. Company by issuing ESOP get loyalty and bonding of their employees as they become part owner of the company. Usually stock is offered to employees at lower rate than market price. So when company performs well ,script commands a good price. SO quantum of financial benefits depends on performance of the company and hence employees are motivated to perform better. In most of the cases option is offered to all employees. Quantum depends on level / performance and number of years in the company. But still it all varies on company to company. There are companies offering ESOP to its employee when he/she completes certain number of years in the company. This is an option so employee has to exercise the option during the given period of time and at given price. There may be a lock in period during which employee can not sale the shares acquired through option. To make this ESOP more attractive Govt. also allowed Dollar based ESOP to the employees of Software Companies. This may help companies and country to retain best talents. We will see guideline for Dollar dominated stock options and Tax treatment of ESOP, in the following paras.
ISSUE GUIDELINES: According to the guidelines, eligible listed and unlisted software companies whose income from software activities is not less than 80 percent of turnover can issue options. And these options can be given to non-resident and resident permanent employees (including Indian and overseas working directors). Promoters and their relatives are not eligible. The guidelines also say that such stock options shall not exceed 10 percent of the company's equity capital. Structuring of such stock options, where given to employees in more than one country is a complex exercise. Apart from the Indian regulatory issues, the company will have to look at regulatory issues in the country in which the securities are listed/issued. For example, under US regulations, stock options can be statutory or non - statutory. A statutory stock option has significant tax benefits in that the taxability is deferred till the sale of stock received on exercise of the options. Non-statutory options are taxable on exercise, as ordinary income and enjoy capital gains benefit thereafter. In case of software companies, many employees are regularly deputed abroad for various periods of time. Issues of taxability would arise when an Indian resident having ADR/GDR linked stock options while in India, exercise his stock options, while on deputed abroad when he may not a resident in India. Similarly an employee who has been granted such options while he was stationed outside India, may exercise the options after having returned to India, although a substantial part of his employment during the currency of the option was exercised outside India. TAX: Locally , companies give options to employees to acquire shares at low price or almost free. There may be a guideline that employee may not be able to sale shares within certain period after acquiring.
Lets see tax aspect with an example:
Mr. X exercise option immediately and buy shares at Rs.200/-
Now if he sale the shares, within one year at Rs.1000/- so ,his profit will be taxed at normal rate i.e. short term capital gain. Hence taxable perquisite is Rs.300000/- and Capital gain is Rs.500000/-. SO, how to exercise option in a best possible way is dependent on scheme designed by the company for its employees. Be tax smart while exercising ESOP.
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