Budget 2020: Last irritant of startups gone in Budget; perfect ecosystem for them in India, says CBDT

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Published: February 5, 2020 11:34:08 AM

Budget 2020-21: During their formative years, start-ups generally use ESOP to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees.

Budget 2020 India: Sitharaman in the Budget proposed to ease the burden of taxation on the employees by deferring the tax payment on ESOPs by five years or till they leave the company or when they sell their shares, whichever is earliest.

Union Budget 2020: With Finance Minister Nirmala Sitharaman proposing to ease the taxation burden on ESOPs for startups, the “so-called” last irritant for budding entrepreneurs have been removed and it is now a perfect ecosystem for them in the country, the CBDT chief has said. CBDT Chairman P C Mody said most of the issues pertaining to startups were already addressed in last budget and the remaining matter on ESOPs (employee stock option plans) was resolved this time. The Central Board of Direct Taxes frames policy for the Income Tax Department and it functions under the Union Finance Ministry. “… So, the so-called last irritant for startups has also been removed… It is now a perfect ecosystem for the startups,” he told PTI. Sitharaman in the Budget proposed to ease the burden of taxation on the employees by deferring the tax payment on ESOPs by five years or till they leave the company or when they sell their shares, whichever is earliest.

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During their formative years, start-ups generally use ESOP to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cashflow problem for the employees who do not sell the shares immediately and continue to hold them for the long term.

Explaining, Mody said a point was raised if some kind of deferment could be made which is what “we have accepted”. “So an employee now can choose to defer his payment of tax on ESOPs, say up to 5 years provided they continue with the company,” he said. If that employee would quit from the company or sells those shares earlier, then it would be taxable at the time of sale but a facility has been given, he added.

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