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October 2024

Taxability of Compensation for Reduction in Value of ESOPs

By Pradip Kapasi | Gautam Nayak | Bhadresh Doshi, Chartered Accountants
Reading Time 34 mins

ISSUE FOR CONSIDERATION

Employee stock options (ESOPs) are granted to employees by the employer company or its parent company as an incentive. These ESOPs so granted can be exercised only after they vest in the employee over the vesting period, after which the employee can choose to exercise the vested ESOPs by applying for shares of the issuer company (employer or its parent) and making payment of the exercise price to the company. The shares are then allotted to the employee by the company.

Such ESOPs are taxable at the time of exercise of the ESOPs by virtue of clause (vi) of section 17(2) as a perquisite under the head ‘Salaries’. This provides that:

“(2) ‘perquisite’ includes the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee.

Explanation: For the purposes of this sub-clause –

(a) ‘specified security’ means the securities as defined in clause (h) of section

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