Equity-settled ESOPs after Thyrocare: tax position meets Ind AS 102

The judicial position on the deductibility of equity-settled ESOP expenditure has been argued at length. The Thyrocare Technologies Ltd. judgment is the latest reminder that the tax answer and the accounting answer are travelling on parallel — but separate — tracks.

The tax question

The classic position from the Revenue: an equity-settled ESOP discount is a notional expense; no real cash leaves the company; therefore no deduction.

The taxpayer's reply, reaffirmed in Thyrocare's facts: the discount is the cost of compensating an employee for services rendered. The fact that settlement happens in shares rather than cash does not unmake the obligation, and the expense is ascertained — not contingent — once vesting starts.

The tribunal and the courts have consistently sided with the taxpayer on this. The Thyrocare order adds a careful re-statement of the principle, and a useful list of supporting authorities.

The Ind AS 102 lens

Ind AS 102 — Share-based Payment — is unambiguous:

• The fair value of the equity instrument at grant date is the measure.
• It is recognised over the vesting period as an expense.
• Equity, not a liability, increases as the expense accrues.

So in the financial statements, the company is already booking the expense. The question is only whether the tax computation should be allowed to follow.

Where this lands now

For listed and Ind-AS-converged companies, the alignment now reads roughly as follows:

1. Books: book the Ind AS 102 charge through P&L over vesting; corresponding credit to Share-based payment reserve in equity.
2. Tax computation: claim the deduction in the year of vesting (subject to the residue of variation orders and any specific section 17 / 192 considerations on the employee side).
3. Disclosure: a clean reconciliation in the tax-deferred note explaining the deduction and any related deferred tax movement.

What we tell boards

• Treat the ESOP scheme document as an accounting and a tax document. The variables you choose at design time — vesting periods, performance conditions, cashless exercise mechanics — will shape both the P&L pattern and the deductibility.
• Review prior years where the deduction was conservatively avoided. The judicial direction is now consistent enough that revisiting earlier positions, where permissible, is often worth the partner-time.
• Map the deferred tax. Where the tax deduction lags the book expense by a period, the deferred tax should reflect that timing — and your auditors will look for it.

Thyrocare does not change the law. But it crystallises the argument well enough that it should be the new starting point for any ESOP tax discussion.