Quick Summary
Employee Stock Option Plans (ESOPs) are a powerful wealth-creation tool for employees of Startup Companies. However, taxation at the time of exercising options has historically created a major cash-flow burden before any liquidity is available. To address this issue, the Government of India introd
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FAQ :
The main benefit is the deferral of tax on the perquisite value of ESOPs. Employees of eligible startups do not have to pay tax immediately when they exercise their options.
Tax becomes payable at the earliest of these events: 5 years from the year of exercise, the date of sale of shares, or the date the employee leaves the company.
No, this benefit applies only if the company is DPIIT-recognized and eligible under Section 80-IAC. Ineligible startup companies and normal companies do not receive this deferral.
No, the deferral only postpones the perquisite tax. Capital gains tax will still apply when the employee eventually sells the shares, based on the holding period and sale price.
The perquisite value is calculated as the Fair Market Value (FMV) on the exercise date minus the Exercise Price. This difference is treated as perquisite income.
If a startup company is not DPIIT-recognized or eligible, employees will have to pay the perquisite tax immediately upon exercising their ESOPs, similar to employees of normal companies.
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