Stock Options Shine as Indian Retention Tool

September 2, 2011 ( – A new report notes that a significant number of Indian companies prefer employees stock options as a compensation tool over other forms of equity-linked incentive plans to attract and retain top talent.

By PLANSPONSOR staff | September 02, 2011
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The survey, conducted by KPMG among 350 firms, including MNCs as well as listed and unlisted Indian companies, said that nearly 64% of Indian companies have implemented an Employee Stock Option Plan (ESOP).

The report notes that taxation of these plans in India has witnessed continuous change, and that up till the financial year ending March 1999, there were no specific provisions for taxing the benefits arising from ESOPs. KPMG notes that these programs were generally taxed as a perquisite in the hands of the employees on the difference between the fair market value (FMV) of the stock on the date of vesting of the options and the exercise price. The report notes that currently these benefits are taxable as perquisite and form part of employees salary income. The employer is required to withhold tax at source in respect of such perquisite. 

According to the report, the perquisite value is computed as the difference between the FMV of the share on the date of exercise and the exercise price, though there are specific valuation rules prescribed for listed and unlisted companies.