Budget 2020: ESOPs taxation get a breathing space

Start-ups need to qualify under Section 80-IAC of the Income Tax Act to avail of the taxation relaxation for its ESOP holders

Kumar Shankar Roy Feb 3, 2020

ESOP tax Budget 2020Budget 2020 has provided a taxation relief for employees of start-ups who receive stock options (ESOPs) from their employer. The burden of taxation on the employees due to ESOPs, being taxable as perks at the time of exercise, has been relaxed by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is the earliest. The change will take effect from April 1, 2020.

Start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. Stock options allow the founders and start-ups to employ highly talented employees at a relatively low salary with the balance being made up via ESOPs. Naturally, ESOP is a significant component of compensation for these employees.

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. Since ESOPs are taxable as perquisites at the time of exercise, this leads to cash flow problems for the employees who do not sell the shares immediately and continue to hold the same for the long-term. You had to pay tax on this irrespective of whether or not you had realised the monetary value of the ESOPs.

“In order to give a boost to the start-up ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest,” Union Finance Minister Nirmala Sitharaman said in her Budget speech.

Note that the start-up needs to qualify under Section 80-IAC of the Income Tax Act for this.

SR Patnaik, Partner & Head – Taxation, Cyril Amarchand Mangaldas feels that deferment of taxes for ESOPs in the hands of employees will be an important decision for the employees to own shares in the employer without getting worried about organising cash to pay taxes. This will also provide greater flexibility to the employers and employees in the structuring of their employment prospects, the expert pointed out.

Start-ups are happy with the ESOP tax relief. “ESOP tax deferment will make start-ups further lucrative as there will be higher disposable income in the hands of its employees if they chose to exercise their rights,” says Anurag Jhanwar, Co-Founder and Partner at Fintrust Advisors LLP.

“Deferring ESOP taxation in the hands of employees is another welcome move. This will continue to help more startups hire the best candidates and retain them, for longer periods of time,” says Anurag Avula, Co-founder & CEO, Shopmatic.

Any move that gives parity or advantage to ESOPs or privately held shares with publicly traded shares is a significant boost to founders and early employees of new companies where risk is greater and salaries often lower, feels Jonathan Bill, Co-founder & CEO, CreditMate.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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