An employee stock ownership plan (ESOP) is an employee benefit plan with a defined contribution. It allows employees to become owners of stock in the company they work for. It is an equity-based deferred compensation plan.
ESOPs have several features that make them distinct from other employee benefit plans. First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, ESOPs allow borrowing and, as a result, “leveraged ESOPs” may be used as a tool of corporate finance.
The nuances of ESOPs came to the forefront on 4 January 2008 when the Supreme Court issued a judgment on the taxability of ESOPs in the case of the Commissioner of Income Tax v Infosys Technologies Ltd (Civil Appeal no. 3725 of 2007).
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Sumes Dewan is a partner at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai and Bangalore as well as a representative office in Singapore.
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