Is ESOP Discount a Deductible Expense for the Employer? (Tax Year 2026-27)

Last updated: 17 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

When a company issues shares to employees under an ESOP at less than the market price, it gives up value. Can the company claim that difference, the “discount”, as an expense in computing its business profits? For years the department said no. The courts have said yes.

The position in the Income-tax Act, 2025

The Act taxes the employee on the benefit: the fair market value on the exercise date less the exercise price is a perquisite (section 17(1)(d) and (4)(h)). It does not carry a matching rule for the employer’s deduction.

The employer’s claim therefore rests on the general deduction in section 34: expenditure, not capital or personal, laid out or expended wholly and exclusively for the purposes of the business or profession, which is not covered by the specific deduction sections. Section 34 corresponds to section 37(1) of the 1961 Act, on which the case law is based. We found nothing in the 2025 Act that changes the reasoning.

Why the department objected

The usual grounds were that no cash leaves the company on a share issue, that the discount is a notional loss of capital receipt rather than an expense, and that the liability is contingent until the employee exercises the option.

What the courts have held

• Biocon Ltd v DCIT (ITAT Special Bench, Bangalore, 16/07/2013): the discount on ESOP shares is employee remuneration expenditure and allowable under section 37(1).
• Karnataka High Court in Biocon (reported December 2020): the department’s appeal was dismissed. Where options vest over a period, for example 25% each year over four years, the employee gets a definite right to that portion at each vesting date and the company is bound to allow it. The discount is therefore an ascertained liability, not a contingent one. Section 37(1) does not require a cash pay out.
• Delhi High Court: the department’s appeals were dismissed in line with Biocon, in the Lemon Tree Hotels matter, and the court has since followed Biocon in the matter reported as PVR Ltd v CIT.

The employer’s deduction is a business expenditure and the employee’s perquisite is a salary item, so one does not depend on the other.

How to claim it

1. The reported rulings measure the discount as the market price on the grant date less the exercise price, and treat it as accruing as each tranche vests. Claim each tranche in the year it vests, use one method consistently, and take advice on the method before you adopt it.
2. Keep the plan document, the board and shareholder approvals, the vesting schedule and the valuation with the return.
3. Deduct and deposit TDS on the employee’s perquisite at exercise, and report it in Form 123 and the salary TDS certificate.
4. Where the company is an eligible start-up under section 140, the employee’s tax is payable later (within 14 days of the earliest of 60 months, sale or leaving the job), but the employer’s deduction question remains the same.

Before you rely on this

• The rulings turn on the facts and terms of the plans before the courts. A plan run through a trust, or one where the employer reimburses a trust, can raise separate questions, so look at your own plan terms.
• The case summaries above are taken from the reports linked below. Read the full order before you quote it to a client.

Frequently asked questions

Official sources

• Biocon Ltd v DCIT, ITAT Bangalore Special Bench, 16/07/2013
• Cyril Amarchand Mangaldas: Karnataka HC affirms discount on issue of ESOPs is a deductible business expenditure
• TaxGuru: Delhi High Court on ESOP discount under section 37(1)
• Income Tax Department: Income-tax Act, 2025 (sections 17 and 34)

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Biocon, Business expenditure, Deduction, Employee compensation, ESOP, ESOP expense, Section 34

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