0 hidden charges. 0 forex

ESOP Accounting, Valuation, and Tax Treatment

Reviewed by
Created on
May 22, 2023


What’s Inside

If you are a business owner or opting to start a business, you might have heard of Employee Stock Option Plans. An ESOP is a benefit plan that allows employees to buy company shares at a discounted price or as part of their remuneration package. ESOPs are a great way to incentivise and retain employees – but they also come with unique accounting, valuation, and tax treatment considerations.

This article will provide a comprehensive guide on ESOP accounting, valuation, and tax treatment, including a guidance note on ESOP.

Understanding ESOP Accounting

ESOP accounting involves recording and disclosing the financial transactions related to ESOPs in a company's financial statements. The accounting treatment of ESOPs depends on various factors, including the type of ESOP, the vesting period, and the fair value of the shares.

  • Types of ESOPs

There are two types of ESOPs: non-qualified ESOPs and qualified ESOPs. In the US, Non-qualified ESOPs are not tax-exempt and do not meet the Employee Retirement Income Security Act (ERISA) requirements. Qualified ESOPs, on the other hand, meet ERISA requirements and enjoy certain tax benefits.

  • Vesting Period

The vesting period is when an employee must wait before they can exercise their ESOPs. Vesting periods can be immediate or gradual, depending on the company's ESOP policy.

  • Fair Value of Shares

The fair value of shares is the market value of the company's shares on the date the ESOPs are exercised. The fair value of shares determines the compensation expense associated with the ESOP.

Valuation of ESOPs

Valuing ESOPs is a complex process that involves estimating the fair value of the shares and determining the discount rate. The fair value of the shares is based on the company's financial performance, market conditions, and other factors. The discount rate is based on the cost of capital and the risk associated with the ESOP.

Tax Treatment of ESOPs

ESOPs are subject to tax treatment at various stages, including grant, exercise, and sale. The tax treatment of ESOPs depends on multiple factors, mainly including the type of ESOP.

  • Grant Stage

At the grant stage, the company issues the ESOPs to the employees. The grant is not a taxable event for the employees, but the company may be entitled to a tax deduction for the cost of the ESOP.

  • Exercise Stage

At the exercise stage, the employees exercise their ESOPs and buy company shares at a discounted price. The difference between the market price and the discounted price is treated as compensation and is subject to income tax and Social Security and Medicare taxes.

  • Sale Stage

The employees sell their shares at the sale stage and realise a capital gain or loss. The tax treatment of the capital gain or loss depends on various factors, including the holding period and the type of ESOP.


ESOPs are an excellent way to incentivise and retain employees. However, they have unique accounting, valuation, and tax treatment considerations. In conclusion, Fi Money is your instant solution to understanding personal finance. You gain access to a range of benefits by opening a zero-balance savings bank account.

With Fi and its licensed banking partner, Federal Bank, effortlessly categorise your daily, weekly, and monthly expenses, enabling easy online money management and wiser spending habits. Remember, it's about spending smarter, not spending less.

Frequently Asked Questions

Q) What Is The Income Tax Rule For ESOP Valuation?

The income tax rule for ESOP valuation depends on the type and timing of the ESOP transaction.

Q) Is Valuation Required For An ESOP Issue?

Valuation is not required for ESOP issues but may be necessary for tax purposes.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
Share this article
Copied Link!
Work & Money
ESOP Accounting, Valuation, and Tax Treatment


View similar articles in
Work & Money
Get the Fi app