TaxFinancial Glossary
ESOP (Employee Stock Ownership Plan)
Definition
A plan that grants employees the right to purchase company shares at a predetermined price (exercise price) after a vesting period. ESOPs are commonly used by startups to attract and retain talent when cash compensation is limited. In India, ESOPs are taxed at two points: at exercise (as a perquisite at slab rate) and at sale (as capital gains).
Why It Matters
ESOPs can be enormously valuable if the company succeeds — early employees at companies like Flipkart and Freshworks earned crores through ESOPs. However, the double taxation (at exercise and sale) and the illiquidity risk (shares may have no market) are significant. Always evaluate ESOPs on post-tax, post-dilution value, not the headline grant value.