top of page

Budget 2025 Preview: Expanding ESOP Tax Deferral to Boost Startups

Jan 9

2 min read

0

1

0



People discussing in an office, surrounded by charts and icons. Text: "Startup 2025," "Employee Stock Options." Vibrant colors, futuristic.

Budget 2025 Preview highlights a crucial step towards empowering startups by expanding the ESOP tax deferment policy. Introduced in 2020, this policy aimed to ease the tax burden on employees and reduce financial strain on startups, but its limited scope left most startups without access to its benefits.



Current Challenges with ESOP Taxation


  1. Two Points of Taxation:

    • At Exercise: Employees are taxed on the difference between the Fair Market Value (FMV) and the exercise price.

    • At Sale: Capital gains tax applies on the difference between the sale price and FMV.


  2. Limited Eligibility: Only employees of 3,605 IMB-certified startups can defer taxes, leaving 97% of DPIIT-recognized startups excluded.


  3. High Employee Turnover: Startups face over 40% turnover, which ESOPs could help address if made more attractive.



Expanding the Policy: A Game-Changer


Budget 2025 Preview calls for broadening eligibility to all DPIIT-recognized startups, providing:


  • Talent Retention: ESOPs with deferred taxes make startups competitive in attracting top talent.

  • Stronger Ecosystem: Smaller startups gain equal footing, fostering innovation and growth.

  • Reduced Risks: Employees won’t face taxes on paper profits when they haven’t earned real income.


Pro Tip: Our audit and compliance services ensure your startup stays ahead of regulatory requirements.



NASSCOM’s Recommendations


  1. Wider Eligibility: Decouple ESOP tax deferment from Section 80-IAC tax holiday benefits.

  2. Safeguards: Limit eligibility to resident employees with uniform ESOP terms across startups.


These changes can revolutionize how startups manage compensation, making ESOPs a powerful tool for growth.



Final Thoughts


The Budget 2025 Preview offers hope for startups to thrive by creating a level playing field. Expanding ESOP tax deferral can reduce administrative burdens, attract talent, and fuel India’s startup ecosystem.


Explore More: Learn how our tax consulting services can help your business make the most of these opportunities.