Salaried employees can save tax after selling ESOPs in open market. Here’s how
How to save tax on ESOPs: The Employee Stock Ownership Plan (ESOP) is generally offered by firms as part of the compensation package. With this, the employee receiving ESOPs becomes the owner of a part of the total stocks of the company at a low or no additional costs. Employees are also allowed to encash such ESOPs after a specified period.
In a rapidly growing company, encashing ESOPs can generate huge profits for employees. However, such profits are subject to tax.
The taxation on ESOPs normally happens twice: 1st time when they are issued/ exercised by the employees and 2nd time when they are sold in the open market, according to Archit Gupta, Founder & CEO, Clear (formerly ClearTax).
According to Gupta, ESOPs are generally issued to the employees at a lesser price than the market price of the shares of the concerned company.
“The difference between the market price and the exercise price is considered to be a prerequisite, which is taxed as salary in the hands of the recipient,” says Gupta.
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At the time of sale, the incidence of tax happens depending on the period they have been held.
In case ESOPs are held for a period of more than 24 months (for shares of an Unlisted Company/ Foreign Company), they are treated as long-term assets and any gains coming from their sale are considered to be long-term capital gains.
Gupta suggests employees can purchase flats or construct a house to get an exemption on the capital gains under Section 54F.
In case the gains are short term, i.e. held for a period not more than 24 months, then the gains are taxed at slab rate and tax saving opportunities are similar to the salaried class
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