Employee Stock Option
A right granted to an employee to buy company shares at a preset price after a vesting period.
Formula
Perquisite Value on Exercise = (Fair Market Value on Exercise Date - Exercise Price) x Number of Options Exercised
Unit
₹
In depth
Options align employees with shareholders and dilute those shareholders when exercised, which is why diluted earnings per share rather than basic is the honest measure for a company with a large option pool. In India taxation occurs twice: as a perquisite at exercise, taxed at slab rates on the gain over the exercise price, and again as capital gains on any subsequent appreciation from the exercise-date value. Employees frequently overlook the first, which is payable in cash in the year of exercise even though no shares were sold. The accounting charge for options runs through the profit and loss statement over the vesting period.
Worked example
10,000 options at a ₹200 exercise price exercised when the share is ₹500 create a perquisite of (500 - 200) x 10,000 = ₹30 lakh, taxed at slab rates that year. A later sale at ₹620 is a capital gain on ₹120 a share.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Employee Stock Option” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.