ESOP Valuation for Accounts and Tax
One option, two values: an option value at grant for the accounts, a share value at exercise for tax.
An employee stock option gives an employee the right to buy shares later at a price fixed today. The same option is valued at least twice, on different dates and by different rules: once for the company's accounts when it is granted, and once for the employee's tax when it is exercised.
Most mistakes in this topic come from mixing the two. The accounting value is an option value at grant date. The tax value is the share value on exercise date minus what the employee pays. They are different numbers for different purposes.
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The Three ESOP Values
Company's accounts
Date
Grant date
What is valued
Fair value of the option, using an option pricing model
Rule
Ind AS 102, paragraphs 10-11
Employee's salary perquisite
Date
Exercise date
What is valued
Fair market value of the share less the exercise price paid
Rule
Income-tax Act, 2025 section 17(1)(d) and 17(4)(h); Income-tax Rules, 2026 rule 15(6)
Later sale of the shares
Date
Date of sale
What is valued
Capital gain on the shares acquired
Rule
Income-tax Act, 2025 capital gains provisions
| Purpose | Date | What is valued | Rule |
|---|---|---|---|
| Company's accounts | Grant date | Fair value of the option, using an option pricing model | Ind AS 102, paragraphs 10-11 |
| Employee's salary perquisite | Exercise date | Fair market value of the share less the exercise price paid | Income-tax Act, 2025 section 17(1)(d) and 17(4)(h); Income-tax Rules, 2026 rule 15(6) |
| Later sale of the shares | Date of sale | Capital gain on the shares acquired | Income-tax Act, 2025 capital gains provisions |
Worked Example
Illustration only. An unlisted Gurugram fintech grants an employee 10,000 options at an exercise price of ₹100, vesting over 3 years.
- 1
Accounting at grant
A Black-Scholes or binomial model, using share price, exercise price, option life, expected volatility, dividends and the risk-free rate, gives ₹45 per option. Expense: 10,000 × ₹45 = ₹4.5 lakh, spread over the 3-year vesting period (₹1.5 lakh a year), adjusted for options expected to lapse.
- 2
Exercise after 4 years
A SEBI category I merchant banker values the share at ₹300 on the exercise date (or a date up to 180 days earlier).
- 3
Perquisite
(₹300 − ₹100) × 10,000 = ₹20 lakh, taxed as salary in the year of exercise. The ₹45 grant-date value plays no part here.
- 4
If the employer is an eligible start-up
Tax on this perquisite is payable within 14 days after the earliest of: 60 months from the end of the tax year, the sale of the shares, or the employee leaving the company.
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Points That Decide Answers
- check_circleListed shares: fair market value for the perquisite is the average of the opening and closing price on the exercise date; with several exchanges, use the one with the highest trading volume.
- check_circleUnlisted shares: a SEBI category I merchant banker values them. The tax rule names a merchant banker, not a registered valuer.
- check_circleService and non-market performance conditions do not change the grant-date fair value; they change the number of options expected to vest. Market conditions, such as a target share price, are built into the fair value.
- check_circleUnder the Companies Act, an ESOP scheme needs a special resolution (section 62(1)(b)). Listed companies also follow SEBI's Share Based Employee Benefits and Sweat Equity Regulations, 2021.
How the Valuation Examination Tests This
Expect perquisite arithmetic (FMV on exercise date less exercise price, times the number of shares), a question on who values unlisted shares for the perquisite, and one on the measurement date under Ind AS 102. The classic trap is using the grant-date option value for tax, or the exercise-date share price for the accounts. Fix the purpose first, then the date.
FAQs
How is ESOP perquisite value calculated?expand_more
Fair market value of the share on the exercise date, less the amount the employee pays, multiplied by the number of shares allotted. For unlisted shares a SEBI category I merchant banker determines the fair market value.
Which date is used to value ESOPs under Ind AS 102?expand_more
Grant date. The fair value of equity-settled options granted to employees is measured at grant date and is not remeasured later.
Which model is used to value employee stock options?expand_more
Black-Scholes-Merton and binomial (lattice) models are the most common. ICAI VS 103 lists their inputs: current price, exercise price, option life, expected volatility, expected dividend yield and the risk-free rate.
Can start-up employees defer tax on ESOPs?expand_more
Yes, if the employer is an eligible start-up. Section 289(3) of the Income-tax Act, 2025 lets tax on the perquisite be paid within 14 days after the earliest of 60 months from the end of the tax year, the sale of the shares or leaving the employer.
Next steps
- Rule 11UAarrow_forward
- Start-up Valuationarrow_forward
- Ind AS 113arrow_forward
- SFA mock testarrow_forward
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