Last Updated : Sep 02, 2014 05:10 PM IST | Source:

What is ESOP?

There are shares that are allotted by a company to employees as part of the Employees Stock Option Plan or scheme.

Arnav Pandya

There are shares that are allotted by a company to employees as part of the Employees Stock Option Plan or scheme. There are two aspects to this whole transaction that are very important for an individual where the first part is the cost of the acquisition for the shares and the other is to know when these are sold and  the amount that is received on sale. These will ensure that the details required for the purpose of calculation of the gains are undertaken properly. If one looks closely at the cost of acquisition then there has to be some careful details that need to be taken into consideration so that the right amount is considered for the tax collection. Here is a detailed look into the issue.

Allotted before April 2007
The time period when the shares have been allotted are important as far as the exact figure for the purpose of the tax calculations are involved. This is because at different points of time there have been different conditions that have been prevalent and hence due to this reason there would be have to be a match with the exact dates to see the conditions that are applicable.  The first condition is if the shares have been allotted before April 1, 2007 then in this case the amount that has been actually paid for the purpose of acquiring the shares would have to be considered as the cost of acquisition in the calculations. This is important because it could be that there are several people who have shares that were allotted long time back and now they are thinking of selling them and in this case the exact calculation would work in this manner so the sale price has to be compared with the actual amount paid.

Allotted after April 2007 but before April 2009
The conditions change if the shares have been allotted in the next two years and this covers the time period from April 1, 2007 to 31 March, 2009. If this is the case then the important thing is that the vesting date becomes the important point to consider. The vesting date is the time when the shares actually come become eligible to be purchased by the individual in the sense that they are available with the person and they have to then make the specific decision as to whether they want to take the shares or not. This is crucial because in this specific case the fair market value on the date of the vesting becomes the cost of acquisition for the individual. In this case the purchase price that is actually paid to the employer should not be considered and thus there is a clear way that is laid out for the purpose of getting the cost.

After April1, 2009
There is a difference that comes into the picture the moment there are shares that are allotted after April 1, 2009. This happens due to the fact that the condition for the date of valuation of the shares once again changes. If the shares have been allotted after April 1, 2009 then the market value on the date of exercise of the option has to be considered. This is the date on which the options are actually bought by the individual and this could be at a date that is different from the date of vesting of the options. This has to be considered in detail and then the cost of acquisition has to be determined and this is important because of the fact that the final capital gains or loss will be determined by this aspect. The final tax to be paid thus will be based on the cost that comes into the picture here.

First Published on Sep 2, 2014 05:10 pm