Many companies give an opportunity to their employees, especially senior staff, to buy their shares under a special procedure. This process is called Employees Stock Option Plan (ESOP). Under this process, the company in a way gives its employees the right to buy their shares. The employee can buy shares of the company by exercising the right granted under this process, though there is no compulsion.

Subas Tiwari

Why is ESOP Given?

The right acquired under ESOP is called Stock Options. Under this, the staff can get the company’s shares for free or at a concessional rate. Startup companies use ESOP more. The reason for this is that while starting a business, they do not have the money to pay more salaries to their employees. Therefore, they give stock options to their staff in the form of compensation packages. Second, the purpose of ESOP is also to keep the employees connected with the company. In such a situation, the company gives such stock option to its employees, which can be used to buy shares in the future.

What is the Process of Stock Options?

If the company gives an opportunity to the employees to buy shares in the future under the stock option, then the date on which the employee becomes entitled to buy the shares is called the vesting date. For example, suppose a company gives 1000 options to its employees on March 31, 2022. Under this, the employee exercises his right to buy shares in several stages. On completion of one year of service, he can exercise the 20% option. At the end of the second year, he can exercise the 30% option. The rest of the option can be exercised by him on completion of the third year.

How Does the Company Benefit from ESOP?

Generally, in ESOP, the company’s share price is pre-determined. This is much less than the market value of the stock. In this way, by buying shares at a lower price, the employee becomes a shareholder of the company. This maintains his loyalty to the company.

He also becomes a partner in the growth of the company. This is beneficial for the company, as the growth of a company depends on the productivity of its employees. Infosys was the first IT Company in India to issue ESOP to its employees. They gave stock options to all their employees, big or small. Many of their small employees have also become millionaires due to this.

Understanding the Vesting Date and Grant Price

Under the ESOP schemes, the stock option is free when it is given to an employee. The terms and conditions on which employee can exercise his rights are spelt in the ESOP scheme. The option given to the employee can be exercised after a certain lock in period, which is generally more than one year.

The right to exercise the option may get vested in the employee in the next future date/s. The dates on which the employee becomes entitled to exercise the right to acquire the shares is called as “vesting date.” The rights may vest fully or partially over the vesting period. For example, an employee is given 1000 options on 31st March, 2016 which can be exercised in phases like 20% on completion of one year, 30% on completion of second year and the balance on completion of the third year from the date of such grant. So, in the instant case, the vesting dates for 200 options is 1st April, 2017, for 300 shares it is 31st March 2018, and for balance 500 shares it is 31st March 2019. The plan may stipulate same or different grant price or exercise price for such vesting. The grant price or the price at which the employee can buy the share from the company is generally fixed and is generally substantially lower than the prevailing market price of the shares in case the shares are listed.

Since the employee is given just an option without any obligation attached to it, it is not mandatory for the employee to exercise the option. The employee may decide to exercise the option or may decide to let the option lapse in case the prevailing price of the shares is lower than the exercise price. The employee is given a time period during which he has to exercise the option, failing which the vested rights may lapse. The date on which the employees exercise their option to buy the shares is known as ‘exercise date’.

There are no cash outflows or taxation implications when the options are granted as well as when the options are vested in the employee.

When to Exercise Options

It is not necessary for an employee to exercise the option once it vests with him. The employee can exercise the right within the stipulated time period. When the employee should exercise the option is a very important question from the financial and taxation angle as well. Once the employee exercises the option, he has to pay for the shares at the price predetermined and thus causing cash outflow. In case the shares are not listed on a stock exchange, the same cannot be liquidated and thus the money gets locked till the shares get listed or the promoters offer you an exit option. Moreover, there is taxation implication if you delay your exercise date because the holding period for capital gain purpose will start from the exercise date. So, the decision has to be taken after having considered cash flow and taxation implications of such decision.

ESOP and its Tax Implications

Tax implications when exercising the option

The taxation of ESOP has a typical structure. It is taxed in two stages. First stage is when the employee exercises the option to buy the shares at the exercise price. The second stage is when the shares are ultimately sold.

Let us first discuss the first stage. As and when the options under the ESOPs are exercised, the difference between the exercise price and the value of the security is treated as perquisite in the hand of the employee. The employer is required to deduct tax at source on the employee exercising the option, treating the same as perquisite. The value of the shares allotted to the employee shall be the average of market price (average of highest and lowest price) on the date the option is exercised in case the shares are listed on any stock exchange in India. In case the shares are not listed, the fair market value of the same shall be as per the valuation certificate obtained from merchant banker. The certificate of valuation of shares should not be older than 180 days from the date of exercise of the option. Even if the shares are listed outside India, the company will have to obtain the certificate from the Merchant Banker as such shares are treated as unlisted shares for ESOP purposes.

Tax implications when the shares acquired under ESOP are disposed off

Now let us understand the second leg of the taxation of the ESOP shares, i.e. when the employee actually sells the shares. The incidence of sale will attract capital gains tax. The gains can be either long term or short term, depending on the period for which the employee has held the shares. The holding period requirement is different for listed shares as well as for unlisted shares. Listed shares shall become long term if held for more than one year. Unlisted shares become long term after three years. The period of three years has been proposed to be reduced to two years in the current budget.

The rate at which the short term or long term gains shall be taxed will depend on whether the shares have been traded on the platform of stock exchange on which the Security Transaction Tax has been paid. In case shares are traded through a broker, the long term capital gains are taxed under Section 112A at 10% over Rs 1 lakh of capital gains. However, such short-term capital gains shall be taxed at a flat rate of 15% under Section 111A.

However, in case the shares are not sold through the platform of the stock exchange, the long term capital gains shall be calculated after applying the indexation to the original cost of purchase. Indexed gains so calculated shall be taxed at a flat rate of 20% plus applicable surcharge and education cess. You have the option to pay tax @ 10% on capital gains without applying indexation benefits. Such short-term capital gains are be treated like any other income and added to other income and taxed at the slab rate applicable.

For the purpose of computing the capital gains, the fair market value as on the date of exercise is taken into account for the purpose of perquisites of the options. It is treated as the cost of acquisition and not the price actually paid by the employee.

The tax implications would be different in case the ESOPs are allotted to a person who is not an employee either by the holding or subsidiary company or the any non-executive director or any other eligible person. The question of it being taxed as perquisite does not arise when the option is exercised by such persons. However, the capital gains tax will have to be paid as and when such shares are sold.

Taxation of Foreign ESOPs

In case the ESOPs are granted by foreign companies to the Indian resident, the same would be taxable in India. Moreover, the taxation provisions of the country of the company which grants the option as well as the double taxation avoidance agreement shall have to be looked into for understanding the exact tax implication. Moreover, concessional tax on long term capital gains under Section 112A or concessional rate of 15% tax on short term capital gain in respect of such shares would not be available as these shares would not be sold on Indian stock exchanges as these are not likely to be listed in India.

Sourced from : Financial Express

When should you sell the Shares?

The decision to sell the shares acquired under ESOP is like any other investment decision. You need to take into account the capital gains implication as well as the need for liquidity for arriving at the decision. Moreover, whether and when to sell will also depend on the future prospects of the company. It may also happen that the shares which you have acquired under ESOP are not listed. So, in such a situation, you cannot sell the shares until the shares are listed or the promoters offer you an exit, which may not be at very attractive terms. In such a situation, it will make sense for you to wait a little till the shares are listed on a stock exchange.

Should you accept ESOPs in lieu of cash as part of salary?

An old saying goes, “One bird in hand is better than two in bush.” Common sense would demand that one should opt for cash in lieu of ESOPs, but here such a comparison may not be so easy to make because generally the projected price of shares under the ESOP plan may be significantly higher than the cash component being offered. Moreover, the option to choose cash in lieu of the ESOP may not always be available.

In this era of digital India, credit card is being used a lot. Not only in metro cities, but also in small towns and many rural areas, people use credit cards. However, many things have to be kept in mind while using a credit card. The most important thing in using a credit card is the minimum amount due, which is seen on every credit card statement. Many times people feel that if they pay at least that much money, then the work will go on. Let’s understand the full game of Minimum Amount Due.

                                                                                                                                    Subas Tiwari 

What exactly is Minimum Amount Due?

If we talk about the minimum amount due written on the credit card, then it is actually a small part of the entire credit card bill. Usually this share is only 5 per cent. Credit card companies write the total bill, minimum amount due and due date on the statement. Many a times people think of paying the minimum amount due and they think that it will not charge them anything.

So what is the benefit of paying the minimum amount due?

If a person pays the minimum due account, then he will not have to pay the late payment charge. However, after that your loan can grow rapidly, as daily finance charges are levied on unpaid bills. That is, if your bill is 50 thousand and your minimum amount due is 2500 rupees, then paying only two and a half thousand will not benefit you. Even though you may not be charged late payment, but every day huge interest will be charged on your bill, which will cause you huge loss.

And that’s how banks make big money

 Often, the question arises in the minds of people as to why credit card companies give a lot of reward points on payment of bills. After all, what is the benefit of these companies? How do these companies make money? The game of Minimum Amount Due is also a means of earning of these companies. If you are late for even one day from the due date, then you will be charged huge interest, which can be up to 48 per cent. The problem is that this interest is charged on a daily basis. That is, the longer you delay paying your bill, the more benefit the credit card companies get.

 Tips to Use Credit Card Wisely

1. Plan your repayment

Before you consider any purchase on your credit card, you need to have a detailed strategy on the repayment. It is a great idea to pay off your credit card bill before the due date. Not only does this help in improving your credit score, but it also helps in establishing a good credit profile with the lender. Such profiles are often given better deals on personal loans, discounted financial products, and a host of other benefits.

Most banks also offer you the option of paying back your credit card bills through installments. If you are going through a financial strain, such measures will help you take the load off your head and are a welcome gesture. However, in the long run, these often lead to higher interest payments, thus making it important for you to plan your repayment.

2. Use a credit card only at trusted merchants

You must be aware of the fact that the odds of a credit card fraud are higher than one with a debit card. That is why it is a great practice to use a credit card only at trusted merchants. It holds in the case of a local store as well as online shopping.

3. Borrow only what you can afford to pay back

With a host of different credit card options available, it is often seen that the credit card limit of an individual is much higher than their monthly income. It is important to track your monthly spending and use only an amount that you can be confident of repaying. It will save you unnecessary interest compounding, huge debts, and help you establish a financially sound future for yourself and your family.

4. Do not max out the limit

When you are using a credit card, the core idea is that you are spending money that you do not have yet. It might seem tempting for new users pushing them on the path of overspending. The first step here is to ensure that you do not max out your credit card limit, no matter what the situation.
Ideally, you should restrict your credit card usage to 2/3rd of the limit. For instance, if your credit card limit is ₹3 lakh per month, plan its usage in a way that you do not spend more than ₹2 lakh. It will help you maintain a good credit card score which will be of help at a later stage.

Most banks offer the facility wherein you can set a personal spending limit on the credit card. It is a great option for people who aren’t confident about their shopping habits.

5. Time your purchases

Every credit card is different, and one of the first things that you need to do is understand the billing cycle of your card. As most credit cards have a monthly billing procedure, if you can time your purchase to days immediately after the bill generation, you will have about 45 days of interest-free period for bill payment. Depending on your card, the period may be longer.

6. Keep track of your spending

The proper usage of a credit card requires one to be disciplined and understand their spending patterns. It is only when you keep a detailed account of all your spend will you be able to identify an unexpected transaction without any time wastage.

When such false transactions are brought to the immediate notice of the bank, most of the time, there is room for rectification. Understand that none of this would be possible if you do not keep track of your transactions on the card.

7. Be aware of the rewards

Almost all credit cards come with a host of benefits and rewards under its loyalty program. From special discounts on e-commerce sites to free movies or flight tickets, there is a range of benefits for credit card owners. To make the most of them, you need to look up the reward program if your credit card issuer and keep yourself updated.

8. Keep a tab on your credit report

Once you are cautious about your spending habits, the next step is identifying an improper detail associated with the card. The details may range from things like a change in your address or employer to amendments in your marital status. Sometimes, mistakes like fraudulent transactions or accounts may be linked to your card.

Unless you read your annual credit report, you will not know about these things. It is a wise practice to invest your efforts in reading and understanding your credit report. It will help you identify errors as well as plan your credit card expenditure.

9. Be wise on your credit card balance

While you need to know how to use credit cards and pay its bills on times, sometimes it is inevitable for you to carry forward a balance. In such a situation, you need to be extra cautious and ensure that you are making every monthly payment promptly. Whenever possible, pay off more than the minimum due so that the amount is paid off sooner. 

Also, remember that if you have some balance amount on your card, you need to be frugal about the credit card’s usage so that the overall monthly usage is stalled at below 30% of the credit card limit. And you must always remember that paying your credit card bills on time touching the credit card limit while having an existing balance is seen in poor light by potential lenders.

With these tips, you are now prepared to use your credit card in a way that favours your finances and ensures that you make the most of the benefits offered.