ESOPs — Employee Stock Options Explained
Employee Stock Ownership Plans (ESOPs) give you the right to buy company shares at a predetermined price. They can be incredibly valuable if the company grows.
How ESOPs Work
Grant: Company grants you X options at grant price. Vesting: Options become exercisable over time (typically 4 years with 1-year cliff). Exercise: You buy shares at grant price (which may be much lower than current price). Sell: Sell shares for profit.
ESOP Taxation in India
At exercise: Difference between FMV and exercise price is taxed as salary income (perquisite). At sale: Difference between sale price and FMV at exercise is capital gain. Double taxation risk — plan carefully!
When to Exercise
If company is listed: Exercise when you can sell immediately to fund the tax. If pre-IPO: Exercise only if you can afford the tax bill and believe in the company. Don't let ESOPs expire!