Understanding ESOPs #4
Taxation of ESOPS explained in way that even a 5-years old can understand!
#startups #incometax 🧵
Taxation of ESOPS explained in way that even a 5-years old can understand!
#startups #incometax 🧵
ESOPs are like a special way of getting paid. But when you get paid, you also have to pay taxes.
There are 2 times when you have to pay taxes for ESOPs:
1. When you decide to turn them into shares, and
2. When you sell those shares.
There are 2 times when you have to pay taxes for ESOPs:
1. When you decide to turn them into shares, and
2. When you sell those shares.
Let's say you have 1000 shares that you can turn into shares by paying Rs. 10 for each share. But each share is worth Rs. 100 in the market.
So, the difference between the two prices is Rs. 90 per share, which is taxed.
So, the difference between the two prices is Rs. 90 per share, which is taxed.
This Rs. 90,000 is the part of your ESOPs that is taxed because it's like making a profit.
This tax rate depends on how much money you make in a year.
It's important to remember that you still have to pay this tax even if you don't sell the shares yet.
This tax rate depends on how much money you make in a year.
It's important to remember that you still have to pay this tax even if you don't sell the shares yet.
When you do sell them, you might have to pay taxes again.
If you sell the shares for more than Rs. 100 per share, then you have to pay taxes on the difference between the selling price and Rs. 100.
If you sell the shares for more than Rs. 100 per share, then you have to pay taxes on the difference between the selling price and Rs. 100.
For example, if you sell the shares for Rs. 110 each, then you have to pay taxes on Rs. 10,000, which is the profit you made from selling the shares.
If you sell the shares for Rs. 100 or less,
then you don't have to pay any more taxes because you already paid taxes when you turned the ESOPs into shares.
then you don't have to pay any more taxes because you already paid taxes when you turned the ESOPs into shares.
IMPORTANT
It's worth noting that employees only benefit from their shares when they sell them.
Otherwise, they are required to pay a substantial tax upfront without even realizing the value of their shares.
It's worth noting that employees only benefit from their shares when they sell them.
Otherwise, they are required to pay a substantial tax upfront without even realizing the value of their shares.
Therefore, as an employee,
it would be advisable to consider exercising your ESOPs only if you have a ready buyer or are confident of finding one in the near future.
it would be advisable to consider exercising your ESOPs only if you have a ready buyer or are confident of finding one in the near future.
If you have not read the 3rd part, here's the link:
https://twitter.com/SuryansMisra/status/1637804433110102018?t=3xNti96_R_DVFrk86iJVLw&s=08
That's all for now and yeah... we covered the taxation of ESOPs in the most simplest way possible.
In the coming part #5 thread, I'll cover the Taxation part again with complete depth and detail with all the technicalities.
In the coming part #5 thread, I'll cover the Taxation part again with complete depth and detail with all the technicalities.
After my next thread, you'll never look for any other guide for Taxation of ESOPs, but you will also be able to advise others. [I PROMISE]
Follow me(@SuryansMisra) & Thanks for reading! 🙏🏻
Follow me(@SuryansMisra) & Thanks for reading! 🙏🏻
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