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ESOP Management

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About ESOP Management

An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization. Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail of these options.

However, Employee stock ownership plans are just options that could be purchased at a specified price before the exercise date. There are defined rules and regulations laid out in the Companies Rules which employers need to follow for granting of Employee stock ownership plans to their employees.

An employee stock ownership plan is a qualified defined-contribution employee benefit plan designed to invest primarily in the sponsoring employer's stock. ESOPs are qualified in the sense that the ESOP's sponsoring company, the selling shareholder and participants receive various tax benefits. Companies often use ESOPs as a corporate-finance strategy and to align the interests of their employees with those of their shareholders.


Stock options are provided by an organization as a motivation to its employees. As the employees would benefit when the company’s share prices soar, it would be an incentive for the employee put in his 100 percent. Although motivation, employee retention and awarding hard work are the key benefits which ESOP brings to the employers, there are several other noteworthy advantages too.

With the help of ESOP options, organizations could avoid the cash compensations as a reward, thus saving on immediate cash outflow. For organizations which are starting their business operations on a bigger scale or expanding their business, awarding their employees with ESOPs would work out to be the most feasible option than the cash rewards.


Organizations often use Employee stock ownership plans as a tool for attracting and retaining high-quality employees. Organizations usually distribute the stocks in a phased manner. For instance, a company might grant its employees the stocks at the close of the financial year, thereby offering its employees an incentive for remaining with the organization for receiving that grant.

Companies offering ESOPs have long-term objectives. Not only companies wish to retain employees for a long-term, but also intend making them the stakeholders of their company. Most of the IT companies have alarming attrition rates, and ESOPs could help them bring down such heavy attrition Start-ups offer stocks for attracting talent. Often such organizations are cash-strapped and are unable to offer handsome salaries. But by offering a stake in their organization, they make their compensation package competitive.


Employee stock ownership plans is considered as perquisites with respect to taxation.. On the other hand, for an employee, ESOPs are taxed at two below-mentioned instances –
While exercising – in form of a prerequisite. When an employee exercises his option, the difference between Fair Market Value (FMV) as on date of exercise and the exercise price is taxed as a perquisite.

While selling – in the form of capital gain. An employee might sell his shares after buying them. In case he sells these shares at a price higher than FMV on the exercise date, he would be liable for capital gains tax.

The capital gains would be taxed depending on the period of holding. This period is calculated from the date of exercise up to the date of sale. Equity shares which are listed on the recognized stock exchange are considered as long-term capital if they’re held for more than 12 months i.e. 1 year. In case the shares are sold within 12 months, these are then considered as short term. Presently, long-term capital gains (LTCG) on the listed equity shares are exempt from tax. However as per the recent amendments in Budget 2018, Sale of equity shares that are held for more than a year on or after 1st April 1, 2018 would attract tax at the rate of 10% and cess of 4%. Short-term capital gains (STCG) are taxed at a rate of 15%.

Frequently Asked Questions

In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan.

Employee ownership – employee benefits. Being part of an ESOPcompany can provide unique rewards for employees. Participants in the plan can receive significant retirement benefits at no monetary cost to them. ... In addition, an ESOP is a great way to enhance the company's ability to recruit and retain top talent.

Employee Stock Ownership Plan (ESOP) An ESOP is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for. It is an equity based deferred compensation plan. Several features make ESOPs unique as compared to other employee benefit plans.

Under this approach, the company can make tax-deductible cash contributions to the ESOP to buy out an owner's shares, or it can have the ESOP borrow money to buy the shares .To borrow money at a lower after-tax cost: ESOPs are unique among benefit plans in their ability to borrow money

An employee stock ownership plan is a qualified defined-contribution employee benefit plan designed to invest primarily in the sponsoring employer's stock. ESOPs are qualified in the sense that the ESOP's sponsoring company, the selling shareholder and participants receive various tax benefits.

A company may make tax-deductible contributions in cash or stock to the ESOP trust. If this contribution is made in company stock, the resulting tax deduction increases the company's cash flow and the additional cash can be used for any corporate purpose.


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