Union Budget 2026: Esops tax pause may be opened to more startups

The Centre is considering extension of the tax deferral on employee stock option plans (Esop) to all startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), said people with knowledge of the matter. The relief, which allows eligible entities to defer tax liability for four years, is currently available only to startups certified by an Inter-Ministerial Board (IMB).

DPIIT recognised 197,000 entities as startups as of October 31, 2025, compared with 4,000 that have IMB certification.

Startups also sought clarity on deductibility of Esop costs as employee compensation and enabling seamless carry-forward of losses and depreciation in restructuring situations. Esops are used as a means of attracting and retaining talented professionals.


Discussions ongoing

“We are looking at the issue before the budget,” said an official.

A final decision on the matter will be taken after deliberations, said the people cited.

The deferral was introduced in 2020, allowing employees of eligible startups to pay tax at a later date, rather than the traditional practice of doing so on the exercise date and the sale date.

Startups with an eligibility certificate under Section 80-IAC of the Income Tax Act are allowed to defer perquisite tax payment or deduction of tax on Esops by four years. Moreover, these startups can carry forward losses if a certain condition is met. All shareholders with voting power on the last day of the year in which the loss was incurred should continue to hold shares on the last day of the previous year to which the loss is to be carried forward.

“We have undertaken several operational reforms throughout the year in our IMB process,” said another official. “It is now a more methodological, objective and speeded-up process.”

From a handful of startups earlier, the number has risen to the 4,000 cited earlier. IMB comprises representatives of DPIIT, other ministries, departments and regulators, depending on the nature of the startup’s business.

Long-standing demand

The startup and venture capital community has urged the government to rationalise tax policies to avoid double taxation on Esops ahead of the budget in previous years as well. Currently, employees who are allowed stock options have to pay income tax when they exercise their Esops, or convert them to shares. They have to pay capital gains tax at the time of selling the stocks.

While the move being examined by the government primarily impacts DPIIT-recognised startups, the issue of Esop taxation has worried the broader set of scaled-up, new-age companies as well.

Employees are issued stock options that typically vest over four years. Upon vesting, employees have the right to exercise these options, meaning they can convert them to shares. For most companies, 25% of options vest at the end of each year.

Under the current tax regime, at the time of Esop exercise, the shares are deemed as income from salary and taxed as per the employee’s tax slab. The value of the share is based on the difference between fair market value and the exercise price.

The issue has gained prominence as more startups get set to go public, a founder told ET.

“In most foreign jurisdictions, Esops are only taxed when they are sold,” the person said. “Several companies are planning to go public, unlocking value for Esops held by employees. At the time they exercise those options, the tax incidence is heavy, especially if the stock price has gone up by the time the lock-in period ends.”

In 2025, IPOs by new-age companies unlocked Esop pools worth almost Rs 8,700 crore, or nearly $1 billion.

Industry groups have previously lobbied the government to make Esop costs an allowable expenditure claimable against profits made by the company.