What is ESOP with Examples?

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In today’s economy, workers receive more than just the standard benefits package provided by their companies. Nowadays, workers receive a lot more from their employers than just pay stubs. As an illustration, consider the Employee Stock Ownership Plan (ESOP). Let us understand what is ESOP with eExamples?

In times of financial hardship, ESOPs can be offer to employees as an incentive. Workers will be more invested in their work if they feel they have a personal stake in the company’s success. One of our clients told us about his employee stock ownership plan (ESOP) in India while we were examining his financial strategy. After doing the calculations, we couldn’t believe what we saw. With inflation and taxes factored in, the benefits were worth almost 20% of his wealth.

What is Employee Stock Ownership Plan (ESOP)?

ESOP is short for Employee Stock Ownership Plan. Employers participate in this scheme by providing employees with company shares at a reduced or no cost, which the employees can then sell after a predetermined period of time. ESOPs were offer to employees of startups like Flipkart, Myntra, and others in India.

An Overview of ESOPs

Most Indians refer to ESOPs, or Employee Stock Ownership Plans, as ESOPs, or Employee Stock Option Plans. Employee stock ownership plans (ESOPs) give workers the option to invest into their employer’s stock at a predetermined price and timetable. It is a common incentive for exemplary performance or long-term dedication to an organisation.

Motivating workers in this way is effective because stockholders feel vested in the company’s success through their own personal financial gain. ESOPs are also useful in retaining staff members. Companies often dole out ESOPs in tranches, with a predetermined timetable for when employees can cash in. Therefore, an employee might receive 3000 equity shares today, distributed in tranches of 1000 over time.

Typically, there is a time requirement before an employee can exercise their option to purchase stock. This time frame is refer to as the “vesting period”. If the employee does not exercise his or her right to purchase shares during the vesting term, the option will expire and will be null and void. This practise was pioneered by the IT sector, but it has now spread to a wide variety of businesses. Employee stock ownership plans (ESOPs) are so effective at attracting and retaining top talent that they are used even by startups.

Example of ESOP

To avoid any potential losses, an employee would want to cash in on his stock options at a time when the share price of the company is high. The employee can make a nice profit by selling the shares at the correct time. If an employee receives 300 shares at Rs. 100 per share and the vesting term is 1 year, the employee will be able to exercise the option to purchase the shares after 1 year.

As long as the stock price is over Rs.100, it is in the employee’s best interest to exercise the option. If the share price is Rs.150 at the time of purchase, the worker can make a profit of Rs.45,000 by selling their shares (Rs.150 x 300). The potential profit for him is Rs 15,000. (The 30% perquisite tax and the 15% short-term capital gain taxes that this method will incur are roughly Rs 4500 and Rs 2250, respectively; nonetheless, the net gain of Rs 8250 is still respectable).

Because employees only pay for the option if they actually utilise it, they don’t have to worry about losing money. They can make a lot of money buying and selling the shares if the market price is high. They are not require to take the ESOPs into account.

How Does ESOP Functions?

The number of shares available, their price, and the eligibility of employees to purchase them are all decisions made by the company offering them. After that, employees are granted ESOPs on a specific date.

As soon as an ESOP is made available, it is placed in a trust fund until the designated time has passed. The “vesting period” is the time during which the employee’s rights are being transfer. If an employee wants to use the ESOP to buy stock, he or she must remain with the company through the vesting term.

Employees can start making use of their ESOPs once the vesting period has ended. The “vesting date” is the day on which all conditions of the vesting schedule have been met. Through their ESOPs, employees are able to purchase shares of the company at prices below their current market value. Another way that workers can invest in the success of their employer is through an Employee Stock Ownership Plan (ESOP).

Companies are require to purchase back ESOPs at fair market value within 60 days of an employee’s termination of employment. Even at retirement before the vesting period has expired.

Benefits of ESOPs

ESOPs can be extremely useful in the long run. Infosys, for instance, distributed numerous employee stock options (ESOPs) when the company was very young. All of them benefited from the company’s success by selling their stock at a profit. A portion of the stock market can be obtain through ESOPs. Working for the company gives you insight into its current status and future plans. To better understand benefit of ESOPs to employees, consider the following.

Save Money by Buying Stock

Employee stock ownership plans (ESOPs) allow workers to purchase a small number of shares at a discount. As a result, they will receive a higher return on their investment in the business.

Received Dividends

As a result of its success, the company may decide to distribute a portion of its earnings to its stockholders in the form of a dividend. Therefore, workers can supplement their income with dividends and gain tangible rewards for their efforts to boost the company’s bottom line.

ESOP Preserves Loyalty

Employees are more likely to stay with the company during the ESOP’s vesting period and beyond.

Having Stock Market Stake

Workers who participate in an ESOP are able to acquire a partial stake in the company’s stock. Employees can imagine themselves as part owners of the business.

Recruitment Strategy

Employer stock ownership plans (ESOPs) are a kind of supplemental compensation that can aid businesses in attracting and retaining top-tier employees. To the contrary, ESOPs assist young businesses attract and retain talented workers even when they can’t afford to pay top dollar.

Increased Productivity

Employee stock ownership plans (ESOPs) can boost productivity and revenue by giving workers a stake in the company’s success.


You should be familiar with ESOPs, their mechanics, their benefits, and the tax implications. Keep in mind the time period required for an ESOP to become fully vested. To make the most of them as part of your compensation, you need be familiar with the details around them. In addition, the ESOP tax calculator in India can help you determine how much tax you’ll owe if you decide to sell shares acquired with the proceeds of an ESOP distribution.

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