## Valuation of Specified Securities / Sweat Equity Shares (ESOPs) [Section 17(2)(vi), Rule 3(8) & 3(9)]

### Value of perquisite

> Perquisite = Fair Market Value (FMV) on the date the employee exercises the option − amount recovered from the employee.

### FMV determination — Equity shares [Rule 3(8)]

Situation	FMV
Listed, single exchange	Average of opening & closing price on the exercise date
Listed, multiple exchanges	Average of opening & closing price on the exchange with highest trading volume
No trading on exercise date, single exchange	Closing price on the immediately preceding trading date
No trading, multiple exchanges	Closing price on the immediately preceding date of the exchange with highest volume
Not listed	Value determined by a merchant banker on the specified date

### FMV — Specified securities NOT being equity shares [Rule 3(9)]

FMV = value determined by a merchant banker on the specified date.

Specified date (for unlisted shares / non-equity securities):

The date of exercising the option, or
Any date up to 180 days prior to the exercise date.

### Year of taxability

General rule: taxable in the year the option is exercised.
Eligible start-up allotment: taxable in the earliest of —

1. After 48 months from the end of the relevant assessment year,

2. The year the employee sells the securities,

3. The year the employee ceases to be employed — whichever is earliest.

Worked example

### Example 1

Listed share, single exchange: On the exercise date, opening price ₹240, closing price ₹260. Employee allotted 100 shares at an exercise price of ₹150.

FMV = (240 + 260)/2 = ₹250. Perquisite = (250 − 150) × 100 = ₹10,000.

### Example 2

Start-up deferral: Eligible start-up allots ESOP shares in PY 2025-26 (AY 2026-27). Employee is still employed and hasn't sold.

Tax is deferred until the earliest of: 48 months after end of AY 2026-27 (i.e. by March 2031), sale, or cessation of employment.

⚠️ Common exam mistakes

Determining FMV on the date of allotment/grant instead of the date of exercise.
For multiple exchanges, using any exchange rather than the one with the highest trading volume.
When no trading occurs, using the buy price instead of the closing (sell) price of the preceding date.
For eligible start-ups, taxing in the exercise year instead of applying the deferred 'earliest of three events' rule.

Reference: Section 17(2)(vi); Rule 3(8) & 3(9) — Income-tax Act, 1961 / Income-tax Rules, 1962

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Valuation of Sweat Equity Shares / Specified Securities (ESOP) [Section 17(2)(vi), Rule 3(8) & 3(9)]

Worked example

⚠️ Common exam mistakes