Startups seek friendly tax regime for ESOPs in Budget 2025

Bengaluru, 24 January: Startups are expecting tax regime governing ESOPs (employee stock options) regime to be more friendly in the upcoming Union Budget 2025 for attracting and retaining top talent.

According to management of startups, currently ESOPs are taxed twice, making it less friendly in terms of taxation. As per the existing regulations, ESOPs are taxed as income tax when exercised and these instruments also attract capital gains tax, when employees sell it.

Usually, companies issue ESOPs in order to attract and retain talent in the Indian startup ecosystem. These instruments are vested over a four year period. Employees can exercise these options by converting them to shares or can encash those when startups raise capital through various rounds.

In the case of unlisted companies, these shares are vested in liquidity events such as Esop buybacks, secondary deals or public offering.

When encashed, these shares are considered income from salary and are taxed as per the Income Tax act as per the employee’s slab. Employees are also liable to face capital gains tax as per the duration of their holding.

Moreover, startups are expecting that the upcoming budget will expand the income deferment policy, which was first introduced in 2020. If implemented, this policy will exempt certain startup employees from paying income tax while exercising ESOPs.

Last year was one of the best years in terms of public listing of Indian startups. More than a dozen startups got listed in the Indian market last year. Startups like Swiggy, Ola Electric, FirstCry, and Go Digit General Insurance among others successfully had their debuts during this period.