Tax on allotment of start-up ESOPs removed by Budget 2020

Budget 2020 has proposed to defer tax deducted at source (TDS) or tax payment on shares alloted by the startups to their employees under the Employee Stock Option Plans (ESOPs). This means that employees of start-ups who are exercising their ESOPs may have to pay tax at a later date.

Sudhakar Sethuraman, Partner, Deloitte India says, "Budget 2020 has also proposed to defer ESOP taxation in the hands of the employees of Startup companies. Employees will now have to pay tax not at the time of allotment of securities but at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier."

"For the employees of start-ups, the deferment of payment of tax from the point of allotment of shares to a later point is a big relief for the employees in view of lack of liquidity at the time when ESOPs are exercised and shares are allotted by the employer," says Shalini Jain, Tax Partner, EY India.


Currently, ESOPs are taxed as perquisites under section 17(2) of the income-tax Act read with Rule 3(8)(iii) of the Rules. The taxation of ESOPs is split into two components:
i. Tax on perquisite as income from salary at the time of exercise.
ii. Tax on income from capital gain at the time of sale.

The change has been proposed on the payment of taxes at the time of exercise of ESOPs. This is currently treated as perquisite under the head income from salary at the time of exercise. This is done to ease the cash flow problem of the employees as no cash benefit arises by buying shares and leads to additional tax payout over and above the exercise price.

According to the proposal, the tax in such a scenario will now be required to be paid as follows:
i) after the expiry of 5 years from the end of the relevant financial year in which shares are allotted; or
(ii) from the date of the sale of such specified security or sweat equity share by the employee; or
(iii) from the date on which the employee ceases to be the employee of the person;

Such tax has to be deposited within 14 days of any of the above-mentioned event taking place.

Once this proposal is passed by the Parliament, it will become applicable from April 1, 2020.