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Table of contents
- Accurate and Compliant Valuations under the Income Tax Act and IND AS 102
- Understanding ESOP Valuations
- When Do You Need an ESOP Valuation?
- ESOP Valuation Methods
- Want to get ESOP Valuation report an from IBBI Registered Valuer ?
- Compliance Requirements
- Why ESOP Valuation Matters
- How Equirium Analytics Adds Value !!
- Why Choose Equirium Analytics ?
Accurate and Compliant Valuations under the Income Tax Act and IND AS 102
Employee Stock Option Plans (ESOPs) have become an essential part of modern compensation structures allowing companies to attract, retain, and motivate key talent while aligning employee interests with business growth.
However, every ESOP grant or exercise comes with valuation and compliance obligations under both the Income Tax Act, 1961 and IND AS 102 (Share-Based Payments).
At Equirium Analytics, we provide defensible and compliant ESOP Valuations that satisfy both tax and financial reporting requirements, ensuring your business remains fully compliant and your employees are fairly rewarded.
Understanding ESOP Valuations
An ESOP valuation determines the Fair Market Value (FMV) of a company’s shares to establish the taxable perquisite value for employees and the accounting expense for the company.
In India, ESOP valuation has two distinct purposes:
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For Accounting and Financial Reporting (IND AS 102):
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Required to record the compensation cost in financial statements.
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The valuation reflects the fair value of options on the grant date.
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Common methods: Black-Scholes Model or Binomial Option Pricing Model.
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For Income Tax Compliance (Rule 3(8)(iii)):
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Required to determine perquisite tax for employees upon exercise of options.
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The FMV is certified by a Merchant Banker for unlisted shares or taken as the market price for listed shares.
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At Equirium Analytics, we assist clients with both preparing separate or reconciled valuations that meet regulatory and audit requirements.
When Do You Need an ESOP Valuation?
ESOP valuations are required at multiple stages of an employee stock option lifecycle:
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Grant Date: To determine fair value for accounting under IND AS 102.
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Vesting Date: For periodic revaluation or accounting updates.
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Exercise Date: For income tax computation of perquisite value.
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Buyback or Secondary Sale: To determine the transaction value between company and employee/shareholder.
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ESOP Scheme Modification: When option terms or exercise prices are revised.
Accurate and timely valuation at each stage ensures full compliance and smooth audit closure.
ESOP Valuation Methods
Depending on the purpose (accounting vs. tax) and the company’s stage, the following valuation methodologies are used:
1. Fair Value Method (IND AS 102 / IFRS 2)
Used for financial reporting and cost recognition.
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The Black-Scholes Model or Binomial Model estimates the option’s fair value.
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Inputs include share price, strike price, risk-free rate, volatility, expected life, and dividend yield.
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The output determines the accounting charge over the vesting period.
2. Fair Market Value Method (Rule 3(8)(iii))
Used for determining employee tax liability at exercise.
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The FMV of shares on the exercise date is determined by a Merchant Banker (for unlisted companies).
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For listed companies, the FMV is the average of the opening and closing price on the exercise date.
Our reports clearly differentiate between accounting fair value and tax FMV to avoid confusion during audits or assessments.
Want to get ESOP Valuation report an from IBBI Registered Valuer ?
Compliance Requirements
Under IND AS 102 / IFRS 2:
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Mandatory for all companies following Indian Accounting Standards.
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Requires determination of fair value on the grant date.
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Must disclose key assumptions in financial statements.
Under the Income Tax Act, 1961:
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ESOPs exercised by employees are taxable as perquisites.
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FMV must be certified by a Merchant Banker (for unlisted shares).
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Applicable under Section 17(2)(vi) read with Rule 3(8)(iii).
Under Companies Act, 2013:
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ESOPs can be issued only as per Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
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Valuation is required before allotment of shares to employees or directors.
At Equirium Analytics, we ensure your valuation meets all three frameworks — accounting, tax, and corporate law — in one integrated approach.
Why ESOP Valuation Matters
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Employee Tax Compliance: Prevents disputes during perquisite taxation.
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Accurate Financial Reporting: Ensures correct recognition of compensation expense.
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Audit and Regulatory Readiness: Provides defensible documentation for auditors and regulators.
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Fair and Transparent Compensation: Builds employee trust in the stock option plan.
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Investor Confidence: Demonstrates governance and valuation discipline.
How Equirium Analytics Adds Value !!
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At Equirium Analytics, we provide end-to-end valuation and advisory support for ESOP implementation and compliance.
Our Deliverables Include:
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Fair Value and FMV reports (IND AS and Income Tax formats).
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Black-Scholes and Binomial valuation models.
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Assumption disclosures and sensitivity analysis.
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Support for audit queries and tax authority representations.
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Optional reconciliation report linking both valuations for internal governance.
We combine valuation accuracy with regulatory clarity, ensuring that your ESOP plan stands on a solid compliance foundation.
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Why Choose Equirium Analytics ?
-
At Equirium Analytics, we provide end-to-end valuation and advisory support for ESOP implementation and compliance.
Our Deliverables Include:
-
Fair Value and FMV reports (IND AS and Income Tax formats).
-
Black-Scholes and Binomial valuation models.
-
Assumption disclosures and sensitivity analysis.
-
Support for audit queries and tax authority representations.
-
Optional reconciliation report linking both valuations for internal governance.
We combine valuation accuracy with regulatory clarity, ensuring that your ESOP plan stands on a solid compliance foundation.
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