Tax Street – December 2023

Focus Point

ESOP – Allowability as an expense in Income-tax Act,1961

Recently, the Employee Stock Options Plan (ESOP) has been introduced in many corporates as a reward scheme for an employee. ESOPs are used to create a sense of ownership in the company with an intent to retain highly productive and skillful employees. Such plans are options provided to employees to purchase shares of the company at a price lower than the Fair Market Value (FMV) of such shares. The price at which an employee exercises such options is known as the exercise price. The difference between the FMV and the exercise price of such shares is a cost for the employer that is amortized in the books of accounts as per the accounting standards and guidance notes.