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Employee Stock option Plan (ESOP) is a corporate strategy for retaining and motivating employees. Under which a company gives its employees the right to buy a certain number of shares at a fixed price (grant) for a certain period of time in years. An employee is required to complete the vesting period to exercise the option. New generation companies are using ESOPs to retain highly skilled employees. In an extremely competitive IT sector, the sense of ownership encourages employees to pursue a long-term career. It is a right, not an obligation for employees to buy shares at a predefined price.
To start with the mission is employee retention, but ESOPs also help in saving of cash compensation. By granting stock option to employees, a company can save funds to channelize the growth.
REQUIREMENT OF VALUATION UNDER ESOP:
Ind AS 102: Ind AS (Indian Accounting Standard) 102 prescribes financial reporting in respect of share-based benefits and is relevant for companies which remunerate their employees by share-based (or stock option) schemes, such as Employee Stock Options (ESOP), Share Appreciation Rights (SAR), Phantom Equity, Share Purchase Plans (SPP) etc.
Income Tax provisions: In reference to amendments vide the Finance Act, 2009, the ESOPs has been made taxable in the hands of employees as ‘Perquisites’, subject to certain conditions. For the purposes of clause (vi) of sub-section (2) of section 17, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined merchant banker (if shares are not listed).