Revolutionizing Startup Growth with ESOP Tax Deferment

In a move to bolster the startup ecosystem, the government introduced a tax deferment policy for Employee Stock Ownership Plans (ESOPs) in 2020. This policy aims to tackle two significant challenges: the immediate tax liability on employees receiving shares without actual monetary gains and the financial strain on startups due to tax deductions often exceeding employees’ salaries.

Understanding ESOP Taxation

ESOPs are taxed in two instances: at the time of exercise, where there is a tax on perquisite value, and at the time of sale, where there is a tax on capital gains. The 2020 policy allows employees of eligible startups to defer tax payment until the sale of ESOPs or the termination of employment, providing much-needed financial flexibility.

The Need for Expansion

Despite its potential, the current policy impacts only a fraction of the startup community. With high employee attrition rates and many ESOPs ending up worthless, expanding the tax deferment to all DPIIT-recognized startups could create a more robust ecosystem, fueling entrepreneurship and economic growth.

Recommendations for a Broader Impact

NASSCOM suggests extending eligibility to all DPIIT-recognized startups, implementing safeguards to prevent misuse, and ensuring uniform terms for all employees. Such measures would empower startups to attract top talent, reduce attrition, and focus on growth, driving innovation and economic progress.

Clarifying ESOP Taxation for Non-Resident Employees

Divya Baweja of Deloitte-India highlights the need for clear guidelines on ESOP taxation for non-resident employees, suggesting rules for apportionment based on the grant to vesting period and considering only the place of rendering services.

Allowability of ESOP Expenditure

The Bombay Chamber of Commerce and Industry points out the lack of express provisions on the allowability of ESOP expenditure in the Income Tax Act. They recommend incorporating a specific provision permitting ESOP expenditure as a revenue deduction, ensuring consistency across all types of companies.