Are you starting a new job or thinking about changing companies? If your offer includes something called ESOPs or RSUs, it is essential to understand what these terms mean before making a decision. Both are types of share-based benefits that companies give to employees. They can help you become a part-owner of the company and even build long-term wealth. But how they work, when you receive them, and how they are taxed can be quite different.
This article will explain the difference between ESOPs and RSUs in a clear and easy way, so you can make better decisions about your job offer and your future.
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What is an Employee Stock Ownership Plan (ESOP)?
An Employee Stock Ownership Plan (ESOP) is a structured program that allows employees to acquire shares in the company, typically at a discounted or pre-determined price. In India, ESOPs are popular with startups and private companies looking to attract and retain top talent without paying high cash salaries. Herei s how ESOPs usually work:
- The company grants a specific number of stock options to employees.
- These options vest over a period (say 25% per year over 4 years).
- Once vested, employees have the option to buy these shares by paying the strike price.
- They can then sell these shares (post IPO or secondary exit) to realise gains.
What is a Restricted Stock Unit (RSU)?
A Restricted Stock Unit (RSU) is another way companies offer shares to their employees. Unlike ESOPs, RSUs do not require you to buy shares. Instead, you are given actual company shares after meeting certain conditions, such as staying with the company for a set time or achieving specific goals.
Here’s what you need to know about RSUs:
- There is no cost to receive the shares.
- Once you meet the required conditions, the shares are automatically given to you.
- Tax is applied when the shares are given, not when they are promised.
- RSUs are more commonly seen in larger companies or those that are already listed on the stock exchange.
Example: If you receive 1,000 RSUs with a four-year schedule, you may get 250 shares each year without paying anything.
ESOP vs RSU: Comparative table of key differences
Here is a simple comparison table to help you quickly understand the key differences between ESOPs and RSUs.
Factor | ESOP | RSU |
---|---|---|
Ownership type | Right to buy shares | Actual shares given |
Vesting | Usually 3–5 years | Time-based or goal-based |
Upfront cost | Yes, you pay to buy shares | No cost |
Tax trigger | When you buy and later sell the shares | When shares are given and then sold |
Common in | Startups, private companies | Public companies, large organisations |
Liquidity | May be limited until the company becomes public | Usually easier to sell if the company is listed |
Wealth-building potential | Higher possible returns but more risk | More stable but with lower return potential |
Taxation of ESOPs and RSUs in India
Knowing how ESOPs and RSUs are taxed can help you plan better and avoid surprises. In India, the tax rules for these two are quite different.
ESOPs (Employee Share Ownership Plan)
- When you buy the shares: The difference between the market value and the price you pay is taxed as part of your salary income.
- When you sell the shares: The profit you make is taxed as a capital gain. The tax rate depends on how long you hold the shares after buying them.
RSUs
- When you receive the shares: The market value of the shares is treated as part of your salary and taxed accordingly.
- When you sell the shares: The gain or loss is treated as a capital gain.
This means you may pay two types of tax—one when you get the shares and one when you sell them—so it’s wise to plan carefully.