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Employees of Only 3,604 Start-ups Are Eligible for Tax Relief on ESOPs: Will Budget 2025 Expand This Benefit?

Jan 30

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People in a modern office discuss strategy. Digital graphs, arrows, and text like "ESOP Plans" and "Budget 202AC" overlay the scene.

Employee Stock Ownership Plans (ESOPs) have become a powerful tool for start-ups to attract and retain top talent. However, when it comes to tax relief, not all start-ups and unlisted companies are eligible. As things stand, only 3,604 government-recognized start-ups qualify for this relief. The big question on everyone’s mind is: Will Budget 2025 extend this benefit to all start-ups and unlisted companies? Let’s dive in.



Current Tax Relief on ESOPs: Who Benefits?


Under Section 80-IAC of the Income Tax Act, only employees of start-ups recognized by the Indian government can enjoy tax relief on ESOPs. These select companies can defer tax payment until the shares are sold, which significantly reduces the immediate tax burden.

For the rest, the current income tax rules can be a bit of a challenge. Here’s how it works:


Taxation at the Time of Exercise


When employees exercise their ESOPs (buy shares), the difference between the market price and the exercise price is treated as a perquisite and taxed as salary income. This can lead to a hefty tax liability upfront.


Taxation at the Time of Sale


  • Short-Term Capital Gains (STCG): If sold within 24 months, the gains are taxed at 15% (for listed shares) or at individual slab rates (for unlisted shares).

  • Long-Term Capital Gains (LTCG): Gains on listed shares exceeding ₹1 lakh are taxed at 10% without indexation. For unlisted shares, LTCG is taxed at 20% with indexation.


This dual-layer taxation can deter employees from fully embracing ESOPs, especially when the immediate tax burden outweighs the potential long-term gains.



Will Budget 2025 Expand ESOP Tax Relief?


The upcoming Budget 2025 is an opportunity to address this disparity. Here are a few reasons why extending tax relief to all start-ups and unlisted companies makes sense:


1. Boosting Innovation


India’s start-up ecosystem is thriving, but broader tax relief on ESOPs could accelerate growth. By making ESOPs more attractive, the government could help start-ups retain skilled talent and encourage innovation.


2. Alignment with Government Initiatives


Initiatives like Start-up India and MSME Registration are already aimed at supporting start-ups. Extending ESOP tax relief aligns perfectly with these goals and demonstrates a commitment to nurturing entrepreneurship.


3. Tackling Challenges


Of course, extending tax relief to all unlisted companies isn’t without its challenges. For instance, tracking deferred tax payments across a larger base may require stronger compliance mechanisms, such as ROC Compliance.


4. Expectations for 2025


Many are hopeful that Budget 2025 will propose measures to expand ESOP tax benefits. A potential amendment could include additional categories like LLPs, One-Person Companies (OPCs), and other unlisted businesses, making ESOPs a win-win for employees and employers alike.



Why Tax Relief on ESOPs Matters


At its core, tax relief on ESOPs is about incentivizing talent and empowering start-ups. Here’s how it helps:


  • For Employees: It reduces the immediate tax burden and allows them to unlock the full value of their shares.

  • For Employers: It makes ESOPs a more compelling part of the compensation package, helping them compete for top talent.


If you’re a start-up or an employee grappling with ESOP-related taxation, our ESOP Services can guide you through the process. From Payroll Services to Income Tax Planning, we’ve got you covered!



What Should Start-ups Do Now?


While we await Budget 2025, start-ups can take proactive measures to ease the burden of ESOP taxation (yes, pun intended!):


  • Consult Experts: Partner with a trusted Auditing Firm to understand the current tax implications and strategize effectively.

  • Compliance First: Ensure all filings, such as GST Annual Returns and Income Tax Returns, are up to date to remain in the government’s good books.

  • Plan Ahead: If you’re considering ESOPs, we can assist with everything from Valuation Services to tax optimization.