ESOP Full Form – Employee Stock Ownership Plan

ESOP stands for Employee Stock Ownership Plan. It is a Business related term, Here you learn the full name and complete information of Employee Stock Ownership Plan.

TermFull Form
ESOPEmployee Stock Ownership Plan

Find Useful Terms and Definitions which we use in daily life but we do not know their full name meaning, Here’s a list of important abbreviations that you should know.

Full Form of ESOP

The full form of ESOP is the Employee Stock Ownership Plan. An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization.

Employee stock ownership plans are issued as direct stock, profit-sharing plans or bonuses, and the employer has the sole discretion in deciding who could avail of these options. 

Employee Stock Ownership Plan

An ESOP is usually formed to facilitate succession planning in a closely held company by allowing employees the opportunity to buy stock.

ESOPs are set up as trust funds and can be funded by companies putting newly issued shares into them, putting cash in to buy existing company shares, or borrowing money through the entity to buy company shares. ESOPs are used by companies of all sizes including a number of large publicly traded corporations.

Since ESOP shares are part of the employees’ remuneration package, companies can use ESOPs to keep plan participants focused on corporate performance and share price appreciation.

By giving plan participants an interest in seeing the company’s stock perform well, these plans supposedly encourage participants to do what’s best for shareholders, since the participants themselves are shareholders.

ESOP Rules

An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares.

Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan. Regardless of how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits.

The 2017 tax bill limits net interest deductions for businesses to 30% of EBITDA for four years, at which point the limit decreases to 30% of Earnings before interest and taxes.

In other words, starting in 2022, businesses will subtract depreciation and amortization from their earnings before calculating their maximum deductible interest payments.

Is ESOP good for employees?

Employee Stock Option Plans or ESOPs are perhaps the most important form of remuneration for employees. From a startup’s perspective, it helps to maintain liquidity and from an employee’s perspective, it is a reward for loyalty.

Can I cash out my ESOP?

An employee stock ownership plan, commonly known as an ESOP, is a type of qualified benefits plan that places employer stock in an account on behalf of the employee. Employees may cash out from an ESOP plan based on the terms listed in the ESOP plan guidelines.

How is ESOP calculated?

ESOPs would be taxed as perquisite, the value of which would be (on date of allotment) = (FMV per share – Exercise price per share) x number of shares allotted. The amount calculated above as perquisite value of ESOP i.e. Rs. 4,00,000 shall form part of X’s salary and be taxable in the year of allotment of such shares.

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