An employee stock ownership plan (ESOP) is one of the employee benefit plans similar to a profit-sharing plan. Through the ESOP plan, employees are rewarded, so that they can acquire ownership or stocks in the company.
ESOP stocks are offered at discounted prices to the employees. In general, ESOP stocks are restricted to use for a certain period of time which makes it impossible for the holder of those stocks, to sell immediately. Before an employee can sell the ESOP stocks, it is mandatory for him to be a part of the company for a certain amount of period.
The ESOP stocks are held in the ESOP trust fund until the employee uses it or is allowed by the company to use the same or leaves the company or retires from the company.
ESOP shares allotted to NRIs are administered under the Non-PIS transaction category. In order to hold ESOP shares, NRIs must have NRI Saving Bank Sb Accounts, NRI trading accounts, and NRI Demat accounts.
ESOP allotted to an NRI is taxable in India. NRI can open a Trading account in India, only to sell the shares gained through ESOP. Only a certain category of companies are allowed to give ESOP shares to their employees who are NRIs or residents outside India, except citizens of Pakistan.
What’s This Vesting Period?
ESOP is issued to the employee after the waiting period popularly known as the vesting period. It generally is of 4-5 years and varies from company to company. After the vesting period, an NRI can buy the ESOP shares allotted to them.
NRI can buy the ESOP shares through the money in their NRE or NRO account, depending on if they want to hold the shares with or without repatriation benefits, as these shares come under the Non-PIS category.
ESOP shares are taxed only when they are used or sold. Using these shares is not compulsory for NRIs. They have the right to purchase the ESOP shares as per their wish.
The difference between the selling price of the ESOP shares and the price at which the ESOP share was used is taxed as a capital gain. The tax rate would depend on the holding period of the stock and would get taxed either as a Long term Capital Gain or a Short term Capital Gain.
Allotment of ESOP
Employee stock ownership plans are allotted to employees as direct stock, profit-sharing plans, or bonuses, and the employer has the authority to decide who could get the benefit of these options. But, Employee stock ownership plans are just options that are buried at a determined rate before the exercise date. There are specified guidelines laid out in the Companies Rules which employers must follow for allotting ESOP to their employees.
Organizations often use Employee stock ownership plans as a tool for attracting and retaining high-quality employees.
With ESOPs, an employee gets the benefit of acquiring the shares of the company at a nominal rate, and sell them, and making a profit.