The Tax Effects for Firms Buying Back Their ESOPs

ESOP buybacks by the firms need to comply with the same conditions as buybacks from the other shareholders. With recent amendments, tax implications for firms buying back their ESOPs stand at par.

What are the tax implications if firms buy back their ESOP

ESOPs are a company's shares representing ownership of the shareholder in the company. ESOPs are given to employees of an organisation at a lower price than their fair price in the market.

An ESOP is an employee benefit plan that offers employees an ownership interest in a company. Thus, the employee also has the freedom of claiming ownership of the income arising from ESOPs. These are the short term employee stock ownership plans that you can buy at a certain price before the exercise date.

Also Read: All you need to know about ESOPs

Understanding the Work Procedure of ESOPs

ESOP shareholders own a specified number of company shares at defined rates for a certain period. Before the employees can exercise their option, they need to go through a pre-defined vesting period implying that they have to provide their services to the company until part or all of the stock options can be exercised.

Let's look at and understand the tax implications for firms buying back their ESOPs.

Also Read: Is Income from Shares brought Under an ESOP Taxable?

Taxation Effects on Firms Buying Back their ESOPs

Recently, startups like Udaan, Zerodha, Razorpay and Swiggy indulged in ESOP buyback. In other words, they got into the buyback of shares from their workers.

Companies always have the option of buying back ESOPs from their workers for different reasons, including the desire of the promoters to provide liquidity to their workers holding ESOPs, especially in the case of unlisted firms.

Offering liquidity by the unlisted firms through the periodic buyback of ESOPs is becoming one of the most significant considerations among startups. Another reason the promoters are offering the buyback of ESOPs is to control equity dilution in the organisation.

The buying back of ESOPs is the same as buying back shares by a company. Hence, the buyback of shares from the ESOP shareholders should comply with similar conditions as buying back from the other shareholders.

The tax implications for the firms buying back their ESOPs, as per the recent amendments, are as follows:

  • The Income Tax Act says that capital gains on shares tender to a company are exempted from tax in the hands of the investors in case of ESOP buyback. The ESOP shareholders will not have to pay any taxes on their profits while tendering the buyback shares.
  • The share value in buyback can exceed the set amount aside for the offer by the company. Therefore, the acceptance ratio, indicating the total number of shares compared to the total number of shares accepted by the organisation in the buyback offer, is one of the most crucial points to consider by the investors. This acceptance ratio applies to all the shareholder categories and includes shares offered under ESOPs.

Also Read: What are the Legal Implications of Buying a Property Jointly?


A firm might not accept all shares provided in the buyback. The shares sold in the secondary and the third-party markets, on the other hand, will continue attracting capital gains tax when they are in the hands of the workers.


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