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ESOP: Deferred Tax Payments for Eligible Start-Ups as per Finance Act, 2020

February 17, 2020     by Prasanna Nagure

The start-ups offer ESOPs as measure to retain talented employee as it’s a cashless perquisite. ESOPs are taxable at the time of exercise as a perquisite. When the employee has exercised the option, basically agreed to buy; the difference between the FMV (on exercise date) and the exercise price is taxed as perquisite. The employer deducts TDS on this perquisite. This amount is shown in the employee’s Form 16 and included as part of total income from salary in the tax return.

While tabling the Union Budget 2020 in the Parliament, Finance Minister proposed deferring the tax payments on ESOPs for eligible start-ups. It is proposed to defer tax on ESOPs eligible start-ups to later date. The proposal states, stock option allotted by an eligible start-up shall be taxable at the earlier of the following events:-

  • expiry of 4 years from the end of the year in which shares are allotted; or
  • sale of stock option by the employee; or
  • resignation by the employee

The employer will need to deduct and remit taxes within fourteen days of the happening of any of the aforesaid events. The tax on ESOP will be computed at the tax rate applicable in the year of allotment. The taxation of ESOP in this manner is helpful as tax burden is shifted to further years.

However, there is no change proposed for tax at the time of sale by employee for such startups– as a capital gain . The employee may choose to sell the shares once these are bought by him. If the employee sells these shares, another tax event happens. The difference between the sale price and FMV on the exercise date is taxed as capital gains.

You can read more about ESOP on A Brief on Employee Stock Options Plan (ESOP) in India by a Private Limited Company.

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