100% deduction for 3 yrs to start-ups with Rs 100 cr turnover; Tax on ESOP deferred by 5 years
Published: Feb 01, 2020
By TIOLCORPLAWS News Service
NEW DELHI, FEB 01, 2020: TO resolve the issue of dual taxation on Employee Stock Option Plan shares (ESOP) held by employees, the Budget has proposed to defer the tax payment by five years, or until employees leave the company, or when they sell their shares, whichever is earlier. ESOPs are an important compensation tool for employees and for startups as they help reduce attrition rates and retain top talent.
The Finance Minister said that Start-ups have emerged as engines of growth for Indian economy. Over the past year, the Government has taken several measures to handhold them and support their growth. During their formative years, Start-ups generally use Employee Stock Option Plan (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 cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term.
Further, an eligible Start-up having turnover upto Rs 25 crores is allowed deduction of 100% of its profits for three consecutive assessment years out of seven years if the total turnover does not exceed Rs 25 crores. In order to extend this benefit to larger start-ups, the Budget has proposed to extend the turnover limit from existing Rs 25 crores to Rs 100 crores. Moreover considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, the Budget proposes to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years.
