Employee Stock Purchase Plan

What is the Employee Stock Purchase Plan?

Employee Stock Purchase Plan is an option granted by the employer to the employees, wherein the employer (i.e. the company) allots a specific quantity of shares/stocks to each of the employees at a significantly discounted price as compared to the market price and employee avail this option through periodical deduction from the date of grant of option till the date of exercise of the price required to be paid.

Not all employees are eligible to receive such an option. Employers provide such opportunities only to loyal and long-term employees who have proved their skill set over the years. It also gives assurance of wellbeing to the employees and it further strengthens the employer-employee relationship.

Employee Stock Purchase Plan

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For eg:
Source: Employee Stock Purchase Plan (wallstreetmojo.com)

How Does it Work?

  • Employer assesses the performance of a group of employees. It chooses the group of employees who have performed well over the years and are confident of staying in the company over a more extended period.
  • The issuer-company quantifies the figures for exercise priceExercise PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more, eligible employees, and the number of options to be provided per employee.
  • On deciding all figures, the company typically waits for the stock to touch a 52-week high. It then provides information about the discount offered on such an option. Employees get the option on a specific date and periodicity to decide.
  • The employees will purchase the stocks at an “exercise price” which is nothing but a market price less discount. Such purchases are usually managed by the employer through periodical deduction from the monthly pay of employees.
  • The deduction starts from the grant date till the date of allotment. Once the company has retained a sufficient amount, it will allow the shares to respective employees.
  • Employees are free to choose whether to sell these stocks immediately or hold for a certain period to gain higher returns. The best thing about ESPP is that the employees gain on the very first day of allotment, i.e. difference between the exercise price and market price.
  • The entire process ensures seamless execution of the stock purchase plans.

Example of Employee Stock Purchase Plan

You can download this Employee Stock Purchase Plan Excel Template here – Employee Stock Purchase Plan Excel Template

The Company has provided the following information:

Example 1.0

We need to analyse employer and employee relation calculations.


Employee Stock Purchase Plan Example 1.2


  • The employee earned a 20% return in just a month by subscribing to the option.
  • However, the employees are given an option to sell immediately or wait for the lock-in period. The Lock-in period applies to the stocks as well as employment.

Eligibility of Employee Stock Purchase Plan

Eligibility criteria for employee stock purchase plan in terms of ESPP referred to in Section 423. As per this section, all employees (of said company or subsidiary companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling company.read more as well as the parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies.read more) are eligible to participate provided that the required conditions are met.

Eligibility conditions apply to the employees.

  • The person should be under the company’s employment from the start of the grant date till at least 3 months before the purchase date of the option.
  • Employees who have terminated the job are ineligible.
  • Employees employed for less than 2 years are not eligible for participation. Also, employees receiving high compensation, as referred to in Section 414 of the tax code are ineligible for participation. As per section 414, high compensation means greater than or equal to $ 130000.
  • Employees under the “Part-time” or “seasonal” or serving under a contract are not eligible for participation.

Tax Implication of Employee Stock Purchase Plan

The employees are not required to pay any tax at the time of receipt of stock in their stock account. The tax implications arise only if the employees sell or transfer in any way the received shares at any time after the said date. It means the taxation part comes into play only if you have earned something or incurred a loss. The rate of tax depends on the period of holding of stocks.

In case the stocks are held for at least 1 year from the date of purchase and at least 2 years have elapsed since the offer date, the employee needs to long term gains tax on the difference of purchase price and selling price.

Further, they need to pay ordinary tax on the lower of the following:

  • Discount earned through the plan
  • The actual amount of gain due to square off

What if the above period is not elapsed? In that case, the employee will pay ordinary tax on the difference between the fair value at the time of allotment and the selling price. The actual profit is liable for the tax.

The above implications were only relevant for “qualified” ESPPs. In the case of non-qualified ESPPs, the employees are liable to pay on the difference between the fair value of the option and the purchase price paid by the employee.


  • The return from immediate sell-off of the stocks is usually higher than the rate of interest offered by a normal savings account.
  • Increase the confidence of employees in the issuer-company and its future goals.
  • The employer-employee relationship gets more robust.
  • These perks are over and above the standard salary package received by employees.
  • Employees are saved from wasting their monetary resources over time through periodical deduction from monthly pay.
  • No financial burden on the employee to purchase the option since the employer deducts the amount periodically.
  • Employers can retain quality and honest employees for the long term.


  • The employer needs to bear the administrative cost of the plan, such as fees paid to consultants, documentation, reporting, compliance with tax and regulatory laws, etc.
  • The employer needs to allocate a different set of people to manage the issue of such a plan.
  • In case the share price decreases, the employee’s gains are reduced.
  • Employees are usually bound by the lock-in period for holding the shares.

Recommended Articles

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