ESOP Valuation in India: Exercise Price, Ind AS 102 and Tax on Exercise

What is an ESOP valuation?

An employee stock option gives an employee the right to buy shares later at a fixed exercise price (section 2(37) of the Companies Act, 2013). Over the life of an option, an unlisted company in India needs up to three different valuations, at three different dates, each under a different law. They answer different questions, so one report cannot stand in for another.

Is a valuation required to fix the exercise price?

Rule 12(3) leaves an unlisted company free to determine the exercise price in conformity with its accounting policies. The Rule does not ask for a registered valuer's report. A valuation is still obtained at grant for three reasons. The explanatory statement to shareholders must disclose the exercise price or the pricing formula (Rule 12(2)). The gap between share value and exercise price drives the accounting expense. And an exercise price with no support invites questions from investors and auditors later.

Other conditions of Rule 12 shape the scheme and therefore the valuation inputs: a minimum of one year between grant and vesting (Rule 12(6)(a)); approval by special resolution, or by ordinary resolution for a private company under the exemption notification of 5 June 2015; and the exclusion of promoters and of directors holding more than 10% of the equity, which does not apply to a startup company for ten years from incorporation. The company keeps a Register of Employee Stock Options in Form SH-6.

How are options valued for the accounts?

Under Ind AS 102, equity-settled options granted to employees are measured at the fair value of the options at the grant date, and that amount is recognised as an expense over the vesting period. Because employee options are not traded, fair value is estimated with an option-pricing model. The model has to take into account, at a minimum, the exercise price, the life of the option, the current price of the underlying share, expected volatility, expected dividends and the risk-free interest rate for the life of the option (Ind AS 102, Appendix B).

• Share price: for an unlisted company this is itself a valuation, normally by discounted cash flow with a market cross-check.
• Expected volatility: taken from comparable listed companies over a period matching the expected life, because the company has no price history.
• Expected life: between the vesting date and the end of the exercise period, reflecting when employees are likely to exercise.
• Risk-free rate: the yield on government securities of matching maturity.
• Model: Black-Scholes for plain time-based vesting; a binomial lattice or Monte Carlo simulation where vesting depends on market conditions or exercise behaviour matters.

When else is an ESOP valuation needed?

• Each later grant: every grant is measured at its own grant-date fair value, so a grant made a year later needs a fresh share value and fresh inputs.
• Repricing or other modification: if the exercise price is reduced, the option is valued immediately before and after the change. The difference, the incremental fair value, is expensed in addition to the original grant-date amount (Ind AS 102, paragraphs 26–27 and B43).
• Cash-settled plans: for share appreciation rights and similar plans paid in cash, the liability is remeasured at fair value at the end of each reporting period and at settlement (Ind AS 102, paragraph 30).

How is the employee taxed, and who values the shares for that?

On exercise, the difference between the fair market value of the shares on the date of exercise and the exercise price is a salary perquisite. For shares not listed on a recognised stock exchange, fair market value is the value determined by a SEBI-registered Category I merchant banker on the date of exercise, or on any earlier date that is not more than 180 days before it (Rule 3(8)(iii) of the Income-tax Rules, 1962; Rule 15(6)(d) read with Rule 15(8) of the Income-tax Rules, 2026). A registered valuer's or chartered accountant's report does not meet this rule.

Employees of an eligible start-up can defer the tax. Under the Income-tax Act, 2025 it becomes payable within 14 days of the earliest of 60 months from the end of the tax year of allotment, the sale of the shares, or the employee leaving the company (section 289(3)). When the shares are later sold, the fair market value taken for the perquisite becomes the cost of acquisition for capital gains.

Who can sign an ESOP valuation?

CA V. Viswanathan prepares the grant-date share valuation and the Ind AS 102 option valuation as an IBBI Registered Valuer for securities or financial assets (IBBI/RV/03/2019/12333). For the tax valuation on exercise we tell clients at the outset that a merchant banker is needed, and coordinate so that the assumptions are consistent.

Worked example: option value, expense and perquisite

Illustrative figures, not a real client. A company grants 1,000 options. The registered valuer's fair value per share at grant is ₹400; the exercise price is ₹100. All options vest at the end of four years and the expected life is five years. Expected volatility is 45%, the risk-free rate 6.9% and no dividends are expected.

• Black-Scholes inputs: S = 400, K = 100, T = 5, σ = 45%, r = 6.9%, dividend yield nil.
• d1 = [ln(400 ÷ 100) + (0.069 + 0.45² ÷ 2) × 5] ÷ (0.45 × √5) = 2.2237; d2 = d1 − 0.45 × √5 = 1.2175.
• N(d1) = 0.986915; N(d2) = 0.888285; e^(−0.069 × 5) = 0.708220.
• Option value = 400 × 0.986915 − 100 × 0.708220 × 0.888285 = ₹331.86 per option.
• Grant-date fair value of the grant: 1,000 × ₹331.86 = ₹3,31,860.
• Expense under Ind AS 102, before any estimate of forfeitures: ₹3,31,860 ÷ 4 = ₹82,965 a year for four years.
• Tax on exercise: if the merchant banker's fair market value on exercise is ₹650, the perquisite is (₹650 − ₹100) × 1,000 = ₹5,50,000.

Two points follow. The option is worth ₹331.86, more than the ₹300 difference between share value and exercise price, because the holder also has time. And the accounting expense (₹3,31,860) and the taxable perquisite (₹5,50,000) are different numbers measured at different dates under different rules.

What documents are needed?

• The ESOP scheme, grant letters and the vesting and exercise terms
• Audited financial statements for the last three years, or since incorporation, and management accounts to the valuation date
• Projections for five years with assumptions
• Capitalisation table on a fully diluted basis, with the rights of preference shares
• Details of grants: number, dates, exercise price, expected attrition
• Earlier valuation reports and the price of the most recent funding round

What is the process and how long does it take?

1. Scoping call: which of the three valuations is needed now, and for how many grant dates.
2. Engagement letter with a fixed fee and document list.
3. Valuation of the equity share at the relevant date.
4. Option valuation for each grant, with the inputs documented for the auditor.
5. Draft shared with management; signed report with UDIN.
6. Coordination with the merchant banker for the perquisite valuation, where exercise is expected.

Reports are usually issued within 5–7 working days of complete information, and within 15 working days for complex cases. The clock starts when the last document is received, not on the date of engagement.

What does an ESOP valuation cost?

Our fee for an ESOP valuation starts from ₹35,000 + 18% GST. The figure depends on the number of instruments or companies to be valued, whether projections exist, and how many laws the same transaction has to satisfy. We quote a fixed fee after a first call and before any work starts. Statutory filing fees, stamp duty and any merchant banker's fee are separate.

Related valuations

Options granted by a US parent need a separate appraisal under US rules: see ESOP, Ind AS 102 and 409A: who signs what. Shares issued directly for know-how are covered in sweat equity valuation in India. To see the effect of a pool on founders, use our ESOP dilution calculator.

Every valuation report we issue, with the law behind it and the person who must sign it, is listed on our valuation services page.

About V Viswanathan & Associates

Frequently Asked Questions

Is a registered valuer mandatory for ESOP valuation in India?

Not for an unlisted company's ESOP scheme. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 leaves the company free to fix the exercise price in line with its accounting policies. A registered valuer's report is commonly used to support the exercise price and the Ind AS 102 accounting.

Who values ESOP shares for income tax?

For shares not listed on a recognised stock exchange, a SEBI-registered Category I merchant banker, on the date of exercise or a date not more than 180 days before it (Rule 3(8)(iii) of the Income-tax Rules, 1962; Rule 15 of the Income-tax Rules, 2026).

How many valuations does an ESOP need?

Up to three for an unlisted Indian company: the share value at grant to support the exercise price, the option value at grant for the accounts, and the fair market value of the share on exercise for the employee's tax.

Which method is used to value employee stock options?

An option-pricing model. Black-Scholes is used for plain time-based vesting; a binomial lattice or Monte Carlo simulation is used where vesting depends on market conditions or early exercise matters.

Can the exercise price be below the fair value of the share?

Yes. Rule 12 allows an unlisted company to set the exercise price freely, including at face value. A lower exercise price increases the option's fair value and therefore the expense recognised in the accounts.

When is tax payable on ESOPs?

On exercise, on the difference between the fair market value of the shares and the exercise price, as a salary perquisite. Employees of an eligible start-up can defer payment; under the Income-tax Act, 2025 it falls due within 14 days of the earliest of 60 months from the end of the tax year of allotment, sale of the shares, or leaving the company.

What is the minimum vesting period for ESOPs?

One year between the grant of options and their vesting, under Rule 12(6)(a) of the Companies (Share Capital and Debentures) Rules, 2014.

How is an ESOP valuation different from a 409A valuation?

An ESOP valuation in India serves the Companies Act, Ind AS 102 and Indian income tax. A 409A valuation is an appraisal of the share under section 409A of the US Internal Revenue Code, needed when options are granted to persons taxed in the United States. One does not replace the other.

How often should an ESOP valuation be updated?

At each grant date for the accounts, because each grant is measured at its own grant-date fair value, and within 180 days before each exercise for the tax valuation.

How long does an ESOP valuation take?

Usually 5–7 working days from complete information, and up to 15 working days where there are many grant dates or performance conditions.

Related Guides

Law stated as at 13 November 2026. Official sources: Companies Act, 2013 and rules (India Code), Rule 3, Income-tax Rules, 1962 (Income Tax Department), IBBI register of registered valuers, Ind AS 102, Share-based Payment (Ministry of Corporate Affairs). This page is general information, not advice on a specific transaction.