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Summary: Stock Appreciation Rights (SARs) are performance-based incentives that allow employees to benefit from the rise in a company’s share price without owning any actual equity. Unlike ESOPs, SARs do not require upfront investment and do not lead to share dilution, making them ideal for startups and unlisted companies. Employees are rewarded based on the appreciation in stock value between the grant and exercise dates, with the gain paid in cash or equity. For example, if SARs are granted at ₹100 and exercised at ₹180, the employee gains ₹80 per SAR. This gain is taxed as salary at the time of exercise, and TDS applies if settled in equity. Employers can claim deductions under Section 37 and must recognize expenses over the vesting period per Ind AS 102. SARs offer liquidity, flexibility, and a strong performance link, making them a smart alternative to ESOPs for companies looking to retain talent without altering ownership structures.

Get Rich Without Owning Shares? Welcome to the World of SARs | Stock Appreciation Rights (SARs): Rewarding Employees Without Giving Away Equity

Imagine this:

You’re an employee of a fast-growing entity. You’ve helped scale the business, and your contributions have significantly boosted the company’s value. Now, you’re told you’ll earn a part of that growth — not in vague promises, but in real financial rewards — without even buying a single share. That’s Stock Appreciation Rights (SARs) in action.

In a world where talent is king and equity is expensive, SARs are emerging as a smart alternative to ESOPs — giving employees a taste of ownership without actual shareholding.

Get Rich Without Owning Shares Welcome to the World of SARs

What Are SARs, Really?

A Stock Appreciation Right (SAR) is like a bet on the company’s future — but without the risk.
It allows employees to gain from the rise in share value between the grant date and the exercise date. Unlike ESOPs, you don’t pay anything upfront. And unlike bonuses, the value is directly linked to how well the company performs.

“SARs reward loyalty and performance, without complicating the cap table.”

Simple SAR Flow:

Phase What Happens
Grant SARs given at a base price (e.g., ₹100/share)
Vesting Lock-in period (say 3 years) during which the employee must stay
Exercise Employee claims the benefit once market price rises (say to ₹180)
Settlement Paid in cash or shares: ₹80 × No. of SARs

Example Snapshot:

  • Base Price: ₹100
  • Market Price on Exercise: ₹180
  • SARs Exercised: 1,000
  • Gain: ₹80,000 (may be paid in cash or shares)

Taxation — The SAR Lens

For Employees:

Stage Tax Implication
At Exercise Taxed as salary perquisite under Section 17(2)(vi)
If equity-settled TDS under Section 192. Later, capital gains tax applies on sale of shares

Cost of acquisition for capital gain = Lower of FMV or issue price

Holding period decides STCG or LTCG

For Employers:

  • Deduction allowed on payout basis under Section 37.
  • Recognize employee benefit expense over the vesting period as per Ind AS 102.

Ind AS 102 in Action

Let’s say XYZ Ltd. grants 1,000 SARs on 01-Apr-2022, vesting in 3 years. Here’s how the accounting unfolds:

Year Fair Value per SAR Expense Recognized
2022–23 ₹40 ₹13,333
2023–24 ₹55 ₹23,334
2024–25 ₹70 ₹33,333
On Exercise ₹80,000 settled (cash or equity)

Journal Entries:

Compensation expenses Recognized proportionately over three vesting years

Dr. Employee Benefit Expense ₹XXX

Cr. SAR Liability ₹XX

On exercise:

Dr. SAR Liability ₹80,000

Cr. Bank / Equity ₹80,000

‘Sell to Cover’: Smart Tax Management

In equity-settled SARs, tax (TDS) arises on exercise. Instead of asking employees to pay cash, companies can auto-sell a portion of shares to cover TDS.

“Sell to cover” ensures compliance without draining employee pockets.

Mini-Example:

  • SAR Gain = ₹80,000
  • Tax (TDS) = ₹24,000
  • Shares worth ₹24,000 sold
  • Remaining shares delivered to employee

ESOP vs SAR – What’s Better?

Criteria ESOP SAR
Ownership Yes No
Dilution Yes Optional
Upfront Cost Yes (Exercise Price) No
Tax On exercise + sale Only on gain at exercise
Liquidity May face difficulty in selling unlisted shares Cash-settled SAR gives direct liquidity

From the employer’s lens, SARs offer flexibility without giving away control. From the employee’s view, it’s reward without risk.

Why Are SARs Gaining Ground?

  • No share dilution
  • Cash or equity flexibility
  • Simpler than phantom stocks or full ESOP plans
  • Great fit for startups, unlisted companies, and tech firms

Final Words

Stock Appreciation Rights (SARs) represent a smart, performance-linked reward system that motivates employees while maintaining the company’s capital structure. With the right tax treatment, clean documentation, and proper accounting, SARs can be a win-win for both employers and employees.

As companies move toward leaner, agile compensation models, SARs could well be the future currency of corporate loyalty.

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