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This article is more than 2 year old.

Why the government is looking to sweeten the ESOP deal for startups

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Several companies operating within an economy will often give their employees an option to buy a certain number of its shares. This is often an attractive option for the employee as the shares will be sold either at a price that is considerably lower than the market.

Why the government is looking to sweeten the ESOP deal for startups
The Central government is getting ready to ease the regulatory framework for the employee stock option plan (ESOP) for startups by subjecting it to taxation only at the time of sale. The move is seen as a part of the government’s strategy to transform India into a startup hub. So it is interesting to understand what is Esop, that has grabbed widespread attention.
What is employee stock option plan
Several companies operating within an economy will often give their employees an option to buy a certain number of its shares. This is often an attractive option for the employee as the shares will be sold either at a price that is considerably lower than the market. They are also offered these stocks as part of the employee’s stipend.
Why do companies opt for this
In simple terms, ESOPs are expected to not only improve the salary prospect of the staff without hurting the company’s pocket but additionally, it is also seen as an able tool to improve the commitment of the staff to the firm in which he too is a stakeholder.
This is particularly crucial for startups who are still in their initial stages and find it impossible to provide high salaries to its staff. But by giving the staff an option of buying stakes at a future date the firm is able to ensure a longer period of commitment from the part of the staff.
What are the merits for employees who opt for this option
The staff, on the other hand, will be able to not only invest in the future growth of the company they are working for, but are also turned in to a much significant part of the company.
How will the new recommendation help employees
With the government aiming to turn the country’s economic atmosphere as much more favourable for the startups, concerns have been raised regarding the need to lighten the tax burden on them. The government has taken several steps in this direction including the protection of startups from ‘angel tax’ and recognising any firm as a startup if its turnover for any of the financial years since incorporation is not more than Rs 100 crore.
If the recommendation regarding the ESOP is implemented then they will not be taxed, as income, when employees exercise their options and convert them to shares.
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