Budget 2020: FM announces relief on tax burden on startup employees on ESOP tax payments

Union Finance Minister Nirmala Sitharaman announced tax relief to all startup employees who receive ESOPs and also announced tax relief to early-stage and late-stage startups

1st Feb 2020
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Several Indian startups can now breathe a sigh of relief, thanks to Finance Minister Nirmala Sitharaman's Budget 2020 announcement to increase the turnover limits for startups to Rs. 100 crore from Rs. 25 crore and provide relief on the tax burden on employees eligible for employee stock options (ESOPs).


In her second Budget speech, India's first female finance minister also said that startups with turnover of up to Rs. 25 crore will be allowed deduction of 100 percent of their profits for three consecutive assessment years out of seven, if the total turnover does not exceed Rs. 25 crores.


Considering the likelihood that early stage startups may not have adequate profits to avail this deduction, the FM proposed extending the period of eligibility for claim of deduction to ten years from the existing seven.


"Indian startups are the engines of growth for the economy. To boost the startup ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment (on ESOPs) by five years or till they leave the company or when they sell their shares, whichever is earliest," FM Sitharaman said.
Budget tax

"During their formative years, startups generally use ESOPs to attract and retain highly talented employees. Currently, ESOPs are taxable as perquisites at the time of exercise, and this leads to cash flow problem for employees who continue to hold them for the long term," noted FM Sitharaman.


Darshan Upadhyay, Partner Economic Laws Practice, on the ESOPs deference said,  

"Tax on ESOPs deferred to earlier of period of 5 years or time of selling  the shares at exit or leaving the job -- this was one of the big hurdles on funding the tax at the time of exercise and making them cumbersome on the ESOPholders. This is a very good initiative for startups."

Harsh Jain, Co-founder and COO, Groww, agreed.


He said, "Startup ESOPs taxation on vesting will be deferred for five years or till exit - whichever is earlier! This is great news as the current system collects taxes too early. This will encourage more startups to get incorporated and create jobs. It will make it easier for startups to incentivise good talent and attract more skilled talent towards working in startups"

The Finance Minister also announced the abolishing of Dividend Distribution Tax (DDT), and said companies will not be required to pay DDT henceforth.


She also proposed a slew of measures to ensure ease of doing business for Indian startups, including a seed fund to support early-stage startups and an investment clearance and advisory cell for entrepreneurs, among other measures.


(Edited by Tenzin Pema)




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