ESOP Accounting and Taxability

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 1^st 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