An employee stock option plan (“ESOP”) is a share-based payment arrangement. The valuation of the options is required for the accounting under Ind AS 102 and for the tax treatment at the time of exercise and sale.
The Accounting
Ind AS 102 requires the company to recognise the fair value of the options granted to the employees as an employee-benefit expense over the vesting period. The fair value is measured at the grant date using an option-pricing model, typically the Black-Scholes model or the binomial model. The model considers the exercise price, the expected life of the option, the current share price, the expected volatility, the expected dividends, and the risk-free interest rate.
The Tax
At the time of exercise, the difference between the fair market value of the shares on the exercise date and the exercise price is taxed as a perquisite in the hands of the employee under Section 17(2) of the Income-tax Act, 1961. The employer is required to deduct tax at source. At the time of sale, the difference between the sale price and the fair market value on the exercise date is taxed as capital gains.
The Valuation Report
An unlisted company that grants ESOPs should obtain a valuation report from a registered valuer to determine the fair market value of the shares, and the report should be updated at the time of each grant. The report must comply with the valuation standards, and it must be consistent with the company’s financial statements.
A technically sound ESOP is supported by a valuation report, complies with Ind AS 102, and is structured to optimise the tax treatment for the employees and the company.
Call to Action
Anuj Desai & Associates advises companies on the valuation and accounting of ESOPs—from the Ind AS 102 measurement and the option-pricing model to the perquisite tax and the capital gains treatment. If you are designing an ESOP, we can help you structure the valuation and the tax.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
Article 290