ESOPs are a significant component of compensation. Start-ups offer ESOPs during formative years to attract and retain talented employees.
Existing Taxability of ESOP
ESOPs are currently taxable at the time of exercise by including in perquisites (ESOPs are taxed as perquisites under section 17(2) of the income-tax Act read with Rule 3(8)(iii) of the Rules) under the head Salary.
The difference between the FMV (on exercise date) and exercise price is taxed as perquisite.
Problems in existing: it leads to cash flow problems for employees, who hold the shares for the long term.
Amendment in taxability of ESOP
Now ESOP shall be taxable at the earliest of the,
- 48 months from the end of relevant Assessment Year, (from the end of the relevant financial year in which ESOPs are bought)
- leaving the company or
- Sale of options
This will greatly help start-ups retain talent and also grant significant relief to the early-stage employees, who are co-contributors in a start-up’s journey in the early years when liquidity is limited," CA Harshil Goyal, Senior Partner- Especia Associates LLP added.
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