Valuation of Perquisites in respect of Sweat Equity Shares or Employees Stock Option Plan (ESOP) [ Section 17(2)(vi) & Rule 3(8) & (9)]

The perquisite in respect of “sweat equity shares” or ESOP is chargeable to tax in the hands of employees, if such shares are allotted or transferred to the concerned employee after March 31, 2009.

What is “sweat equity shares” :

It means shares issued by a company to its employees (including directors, former employees) at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called”. Such shares may be equity shares, any other shares, scrips, debentures, derivatives or units. These may be transferred/allotted directly or indirectly to the employee.

What is ESOP (Employees Stock Option Plan) :

ESOP is an abbreviation which stands for employee stock option plans. Under the ESOP plan, an employee (at his option) can acquire shares in the employer-company at a reduced price after completion of a specified period of service.

In which year it is Chargiable to Tax :

Value of perquisite on the above basis will be taxable in the hands of employee in the previous year in which shares or securities are allotted or transferred to him. It may be noted that fair market value shall be calculated on the date on which the employee exercises the option but perquisite will be taxable in the year in which shares are allotted.

How to find out Taxable Value of Perquisites :

The value of such specified security or sweat equity shares shall be the “Fair Market Value” of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee in respect of such security or shares.

“Fair Market Value”

  • In the case of shares listed in India, the fair market value shall be the average of the opening stock exchange price and closing stock exchange price of the share on the date of exercise of option.

  • Where, however, on the date of exercise of the option, the share is listed on more than one recognized stock exchanges, 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.

  • Where on the date of exercise of the option, there is no trading in the share on any recognized stock exchange in India, the fair market value shall be the closing price of the share on any recognised stock exchange on a date closest to the date of exercise of the option and immediately preceding such date.

  • In the case of unquoted shares, the fair market value shall be determined by a merchant banker.