This is my approach to explain the ESOPs Accounting, Taxation & Compliance in simpler terms.

Ind AS (Accounting)

The accounting for ESOP is dealt by Ind AS 102, Share-based Payment. First we need to understand terminology used in ESOP, which are as follow:

Grant :  Grant means issue of options to employees under 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 vesting of options till 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: 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.

Let’s take the example

Grant Date 01-02-2020
Vesting Date 01-03-2023
Vesting Period (in Years) 3.083 Years
Market Price on Grant Date Rs. 148
Face Value Rs. 1
Exercise Price Rs. 60
Option Value-Black Scholes Model Rs. 95.89
No Of Shares Vested Rs. 2500
No. of Employees to whom shares option granted Rs. 100

In first year management will identify approximate No. of Employees will leave the organisation so as to identify the amount to be amortized over vesting period. Each year company will revise the estimation of employee leaving the organisation and amortizing prospectively based on revised assumption.

Year 1

No. of Employees left the Job is 2

Approximate No of employee will leave the organization is 10 each year from 31/03/2020

Approximate No. of employees at the end of 31/03/2023 to whom share will vest =100-2-10-10-10=68

Calculation of Employee Benefit Expenses during the year:

Date

Cumulative Expense (Rs.)

Expense to be recognized during  year (Rs.)

31-Mar-2020

8,81,151

2500*95.89*68*.167/3.083

8,81,151

No. of Shares* Option price*Approximate No. of employees to whom shares will vest 

Journal Entry for Above Example:

Date Particulars Amount (Rs.)
01-03-2020 Employee compensation expense account

Dr.

8,81,151
To Share Based Payment Reserve A/c 8,81,151
(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

NOTE:

1. Employee compensation expense account is transferred to Employee Benefit Expenses account.

2. Share Based Payment Reserve is disclosed in Statement of Change in equity.

Year 2

No. of Employees left the Job till date are 2+9

Approximate No. of employees at the end of 31/03/2023 to whom share will vest =98-9-10-10=69

Calculation of Employee Benefit Expenses during the year:

Date

Cumulative Expense (Rs.)

Expense to be recognized during  year (Rs.)

31-Mar-20

8,81,151

2500*95.89*68*.167/3.083

8,81,151

31-Mar-21

62,58,766

2500*95.89*69*1.167/3.083

53,77,615

(62,58,766-8,81,151)

Journal Entry

Date Particulars Amount (Rs.)
31-03-2021 Employee compensation expense account

Dr.

53,77,615
To Share Based Payment Reserve A/c 53,77,615
(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Year 3

No. of Employees left the Job till date are 2+9+12

Approximate No. of employees at the end of 31/03/2023 to whom share will vest =89-12-10=67

Date

Cumulative Expense (Rs.)

Expense to be recognized during  year (Rs.)

31-Mar-20

8,81,151

2500*95.89*68*.167/3.083

8,81,151

31-Mar-21

62,58,766

2500*95.89*69*1.167/3.083

53,77,615

31-Mar-22

1,12,86,512

2500*95.89*67*2.167/3.083

50,27,746

(1,12,86,512-62,58,766)

Journal Entry

Date Particulars Amount (Rs.)
31-03-2022 Employee compensation expense account

Dr.

50,27,746
To Share Based Payment Reserve A/c 50,27,746
(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Year 4

No. of Employees left the Job till date are 2+9+12+12

No. of employees at the end of 31/03/2023 to whom share will vest =65

Date

Cumulative Expense (Rs.)

Expense to be recognized during  year (Rs.)

31-Mar-20

8,81,151

2500*95.89*68*.167/3.083

8,81,151

31-Mar-21

62,58,766

2500*95.89*69*1.167/3.083

53,77,615

31-Mar-22

1,12,86,512

2500*95.89*67*2.167/3.083

50,27,746

01-Mar-23

1,55,82,125

2500*95.89*65*3.083/3.083

42,95,613

(1,55,82,125-1,12,86,512)

Date Particulars Amount (Rs.)
01-03-2023 Employee compensation expense account

Dr.

42,95,613
To Share Based Payment Reserve A/c 42,95,613
(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Journal Entry for Allotment of Shares

31/08/2023 or Earlier date on which shares exercised Options exercised 60 Employees
Bank A/c Dr. (2500*60*60) 90,00,000
Share Based Payment Reserve A/c (15582125*60/65) 1,43,83,500
     To Share Capital A/c (2500*1*60) 1,50,000
     To Share Premium A/c (Bal. Fig.) 2,32,33,500
(Being Allotment of Shares)
Journal Entry for Payment of Tax on Perquisites
Employee Benefit Expenses A/c Dr. XXX
    To Bank A/c    XXX
(Being Tax paid on perquisites on behalf of employee)

Journal Entry for Transferring Balance in Share Based Payment Reserve to General Reserve

Options not exercised by 5 Employees

31-08-2023

Share Based Payment Reserve A/c 11,98,625
     To General Reserve      11,98,625

Sometimes there is a situation where holding company issue shares to the Employees of subsidiary company the above entries will change every year, where both the holding and subsidiary need to record journal entry as follow:

Journal Entry in books of Holding Company

Date Particulars Amount (Rs.)
01-03-2020 Investment in Subsidiary      Dr. 8,81,151
To Share Based Payment Reserve A/c 8,81,151
(Being grant of 2500 options to employees of Subsidiary company worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Journal Entry in books of Subsidiary Company)

Date Particulars Amount (Rs.)
01-03-2020 Employee compensation expense account

Dr.

8,81,151
To Equity (Statement of Change in Equity) A/c 8,81,151
(Being grant of 2500 options to employees by holding company worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Taxation for ESOP Scheme
In Hands of Employee upon allotment of shares

Exercise Year : 2021-22

Taxable in AY 2022-23

1. Perquisites u/s 17(2)(vi)  3,75,000
(FMV1 on Date of Exercise-Exercise price)*No. of Shares
 (210-60)*2500
2. Tax paid by employer on behalf of employee for perquisites Nil
(Exempt u/s 10(10cc)2
Note:
1FMV on Date of Exercise: Rule 8
a. If there is trading in the share on any recognized stock exchange on date of exercising, The fair market value shall be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share
b. If there is no trading in the share on any recognized stock exchange on date of exercising, the fair market value shall be- the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of exercising of the option and immediately preceding such date, is recorded on more than one recognized stock exchange
2Note : Calculation of Tax Amount u/s 192(1B) if option u/s 115BAC not availed. Amount
Step 1 : Calculate Total Salary (including the above perquisites &   Deductions taken, if any) 12,00,000
Step 2: Calculate TDS amount on Step 2 179,400
Step 3: Calculate Average Rate (Step 2/Step 1) 14.95%
Step 4: TDS to be Deducted

Average Rate * Perquisites (3,75,000*14.95%)

56,063
2Note : Calculation of Tax Amount u/s 192(1B) if option u/s 115BAC availed (optional) i.e. where no exemptions and deductions are allowed
Step 1 : Calculate Total Salary (including the above perquisites ) 14,00,000
Step 2: Calculate TDS amount on Step 2 1,62,500
Step 3: Calculate Average Rate (Step 2/Step 1) 11.61%
Step 4: TDS to be Deducted

Average Rate * Perquisites (3,75,000*11.61%)

43,527

Important note:

The above calculation for availing option u/s 115BAC will differ from employee to employee based on their exemption, deduction and Total income (refer section 115BAC). From the AY 2021-22, the assesse has option to avail option u/s 115BAC based on his benefits.

Normal Tax Rate Option u/s 115BAC
For availing option u/s 115BAC person need to waive off following Exemption
Section  Exemption
10(5) Leave travel concession
10(13A) House rent allowance
10(14) Allowances Received under employment except Transport allowance, Conveyanc  Allowance, tour travel Allowance and Daily Allowance
10(32) Deduction of Rs.1500 per child for minor’s income clubbed.
16 Standard deduction of Rs.50000 from salary income
24(b) Interest on borrowed capital for acquisition or construction etc. of House Property held as SOP
Chapter VIA All the deduction under chapter VIA except deduction under section 80CCD(2)

Treatment in Form 16

1. Perquisite is Taxable u/s 17(2)- Added in Gross Salary.

2. Tax paid by employer on above perquisite is 1st added in Gross Salary and then provide under exemption u/s 10(10cc)

3. Tax paid by the employer to be included in TDS deducted till date.

Deduction to Employer
1. Deduction to Employer w.r.t. issue of ESOP on Discount every year which  is debited to Profit & Loss account
         AY 2021-22 2,70,37,376
         AY 2022-23 3,14,35,201
         AY 2023-24 1,26,90,310
         AY 2024-25 42,95,613
2. Deduction to Employer w.r.t. Tax paid on behalf of employee on issue of   ESOP on Discount is Disallowed u/s 40(a)(v) Nil

1. Deduction to Employer w.r.t. issue of ESOP on Discount: The discount, which is debited in the profit and loss account of the company, is thus expenditure incurred wholly and exclusively for the purpose of the business. Hence it should be allowed under the provisions of section 37(1) of the Income Tax Act, 1961. (Take legal opinion whether we can take deduction based on calculation of Black Scholes)

2. Deduction to Employer w.r.t. Tax paid on behalf of employees on issue of ESOP on Discount:

2Note: 40(a)(v) No deduction shall be allowed to employer for such taxes paid. on behalf of employees

Tags:

Author Bio

Qualification: CA in Job / Business
Company: BLISS GVS PHARMA LIMITED
Location: mumbai, Maharashtra, IN
Member Since: 14 Feb 2020 | Total Posts: 2

My Published Posts

More Under Income Tax

One Comment

  1. vswami says:

    OFFHAND

    Under all ‘stock option schemes’, – ESOP or any other,- does not designation of a ‘nominee’ by employee require to be mandated / insisted upon, so as to guard against otherwise possible exigencies?
    In the absence of such a designation, there could conceivably arise difficult questions from the viewpoint of the lawful rights of employee’s successor-in-interest; so also, vis a vis inevitable tax implications, even otherwise ?!
    Any useful thoughts/ eminent viewpoints to spare and share?
    courtesy

Leave a Comment

Your email address will not be published. Required fields are marked *