Union Budget 2020:Deferment of Tax on Income from Employee Stock Option Plan (ESOP) of Start-ups

Union Finance Minister Smt Nirmala Sitharaman has given a major relief to startup employees getting Employee Stock Option Plan (ESOP).

ESOP in Startups

Employee Stock Option Plans ESOPs are significant part of compensation for the senior management/highly valued employees of start-ups, as it allows the founders and start-ups to employ good personnel at a relatively low salary amount with balance being made up via ESOPs.

Currently ESOPs received by the startup employees are taxed as perquisites.

ESOPs have twin impact from taxation perspective:

1. Tax on exercise of ESOP as perquisite in income from salary.
2. Tax on income from capital gain at the time of sale.

The first incidence leads to cash outflow for employee in form of tax wherein non cash benefit is received.

Eligible Startup’s and employee’s burden will be eased with no payment of taxes by the employees or TDS by the start-up employer. 

In financial year 2020-21 or subsequent financial year, Eligible startup shall deduct or pay tax on such income within fourteen days —

1. after the expiry of forty eight months from the end of the relevant assessment year; or
2. from the date of the sale of such specified security or sweat equity share by the assessee; or
3. from the date of which the assessee ceases to be the employee of the person;

whichever is the earliest on the basis of rates in force of the financial year in which the said specified security or sweat equity share is allotted or transferred .

The said amendment shall be available to an eligible start-up, if the total turnover of its business does not exceed 100 crore rupees in any of the financial years from the year of incorporation.

These budget amendments will take effect from 1st April, 2020.