My employer valued my stock options on a valuer's report. What does the valuation rule actually require, and how do I test the number?
The charging clause fixes the measure as the fair market value on the date the option is exercised less what you paid, but it does not fix the value itself - it says fair market value means the value determined in accordance with the method as may be prescribed. The method is in the rules, and for an unlisted company it is a single line: the value of the share as determined by a merchant banker on the specified date, the specified date being the exercise date or any date not more than one hundred and eighty days before it. So there are only four things to test - the date, the route, the valuer's registration, and whether the report is inside the window.
Start with what the section does and does not do. The Explanation to s.17(2)(vi), on the departmental page for s.17 of the 1961 Act, provides that "the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares", and then defines fair market value itself as "the value determined in accordance with the method as may be prescribed". Every rupee of the perquisite therefore comes out of a rule, not out of the section. That page is an old snapshot carrying a 2021 date, so it is used here only for text that has not moved.
Under the Income-tax Rules, 1962 the method sat in sub-rules (8) and (9) of Rule 3. Those sub-rules could not be opened on the department's site: every address tried under the rule namespace served a different set of rules altogether - the Vivad se Vishwas Rules, the Public Provident Fund Scheme - and the consolidated Rule 3 document was refused. What the department's own note on the taxation of employee stock option plans states is the method itself: for a listed share, the average of the opening price and closing price of the share on the exercise date on the stock exchange; where it is listed on more than one exchange, the exchange which records the highest volume of trading; where there is no trading on that date, the closing price on the exchange on a date closest to the date of exercising and immediately preceding it; and for an unlisted share, the value of the share as determined by a merchant banker on the date of exercising, or on any date earlier than the date of exercising which is not more than 180 days earlier.
The same method is now in Rule 15 of the Income-tax Rules, 2026, which is on the departmental site and can be quoted. Sub-rule (6) reads: "For the purposes of section 17(1)(d), the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined as follows:- (a) in a case where, on the date of the exercising of the option, the share in the company is listed on a recognised stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange, subject to the provisions of clause (b); (b) in a case where, on the date of exercising of the option, the share is listed on more than one recognised stock exchanges, the fair market value shall be the average of the opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share; (c) in a case where, on the date of exercising of the option, there is no trading in the share on any recognized stock exchange, the fair market value shall be- (i) the closing price of the share on any recognised stock exchange on a date closest to the date of exercising of the option and immediately preceding such date; or (ii) the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of exercising of the option and immediately preceding such date, is recorded on more than one recognised stock exchange; (d) in a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date." Sub-rule (7) deals with a specified security that is not an equity share: the value "shall be such value as may be determined by a merchant banker on the specified date".
Two definitions in sub-rule (8) carry the argument. A "merchant banker" means "category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992)". And "specified date" means "(i) the date of exercising of the option; or (ii) any date earlier than the date of the exercising of the option, not being a date which is more than one hundred and eighty days earlier than the date of the exercising".
So the checks on an unlisted-company figure are these. Is the report signed by a SEBI category I merchant banker, and does it say so - a chartered accountant's certificate is not a valuation under this rule, whatever else it may be good for. Is the valuation date the exercise date, or a date inside the one hundred and eighty days before it - a report dated after the exercise, or more than one hundred and eighty days before it, is outside the rule. Is the date the employer has used the date of exercise and not the date of allotment, since the rule fixes the value on exercise while the year of charge follows allotment. And is the figure the merchant banker's figure rather than a figure the board resolved on.
What the rule does not do is tell the merchant banker how to value. There is no prescribed method inside clause (d) - no net asset value, no discounted cash flow, no bar on a discount. That is a different architecture from Rule 11UA and Rule 11UAA, which prescribe a formula and name who may certify for s.56(2)(x) and s.50CA. A valuation produced under those rules for a transfer is not a valuation under this rule for a perquisite, and the two will not usually give the same number. Where the department resists a perquisite figure it will normally do so by attacking the report, not the rule, because the rule leaves the method open; the corresponding point for the employee is that the report is the only part of the computation capable of being wrong in his favour.
That the rule fixes a method and the method binds is not a new idea. In All India Bank Officers' Confederation v. Regional Manager, Central Bank of India the Supreme Court upheld the prescribed method in Rule 3 for valuing a concessional staff loan and rejected the argument that a different benchmark should be used; the same logic cuts both ways here, since a figure arrived at otherwise than by the prescribed route is open to challenge whichever side produced it.
On the change of statute, Rule 15(6) opens with the words "For the purposes of section 17(1)(d)", which is the ESOP perquisite clause of the Income-tax Act, 2025.
For an unlisted company the perquisite is a valuer's number, and the employer has usually taken it from the last funding round or the last board valuation rather than from a report answering this rule. If the report is not a category I merchant banker's report, or is dated outside the one hundred and eighty day window, or is dated to allotment rather than exercise, the figure in Form No. 12BA is not the figure the rule prescribes - and that is a submission on the assessment, not a complaint about the withholding.
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My client is an employer facing a s.201 order for not deducting on LTC where the employees' itineraries included a foreign leg but the reimbursement was limited to the domestic shortest-route fare. Is the bona fide estimate defence available?
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