Employee Stock Option Plan (ESOP) Accounting and Taxability

Employee Stock Option Plan (ESOP)  Accounting and Taxability

ESOP or Employee  Stock Option Plane is the option that a company provides to its employees to purchase the company’s shares on future dates at a pre-determined price. It is popular these days and many times part of the salary offer given to newly hired executives.

How are taxes calculated on ESOP?

When an employee sells the shares which were allotted to him under ESOP, tax is levied on any amount of profits or gains arising from such transaction. Such profit is taxable under the head ‘Capital Gains’.

In the case of unlisted shares, gains will be treated as long-term if shares are held for more than 24 months. Tax will be levied @ 20% with indexation benefit and @10% without indexation benefit. If the holding period of such shares is less than or equal to 24 months, gains will be treated as short-term and will be taxable as per slab rates of the taxpayers.

Taxability of these shares under ESOP -

ESOP Taxation - while exercising the shares -

Perquisite value of ESOP (on date of allotment) = (FMV per share – Exercise price per share) x number of shares allotted.

The amount calculated above as perquisite value of ESOP i.e. Rs. 4,00,000 shall form part of X’s salary and be taxable in the year of allotment of such shares. 

Ind AS (Accounting):

The accounting for ESOP is dealt with by Ind AS 102, Share-based Payment. First, we need to understand the terminology used in ESOP, 

Exercise: It is the act of an application being made by the Employee to the Company to have the Options vested in him issued as Shares upon payment of the Exercise Price. Exercise can take place as specified after Vesting.

Exercise Period: The period from the date of the vesting of options until the date the options can be exercised. On the expiry of the Exercise Period, any Options that have not been exercised will lapse and cease to be valid for any purpose.

Exercise Price: The amount to be paid by an employee at the time of exercise of his option. This price is determined at the time of grant and remains constant over the term of the option.

Market price: The market price of a share on a given date means the closing price of the shares on that date on the stock exchange on which the shares of the company are listed.

Option: Option means a stock option granted pursuant to the Plan, comprising of a right but not an obligation granted to an employee under the Plan to apply for and be allotted Shares of the Company at the Exercise Price determined earlier, during or within the Exercise Period, subject to the requirements of Vesting.

Vesting: Vesting means the process by which the employee gains full rights to the options granted to him in pursuance of ESOP.

Vesting period: The period during which the vesting of the option granted to the employee in pursuance of ESOP takes place.

Amortization: An accounting procedure that gradually reduces the cost or value of an asset through periodic charges against income.