Startups hail Budget for relaxing ESOPs norm

Startups on Saturday welcomed the Budget proposal of relaxing ESOPs taxation, but said linking it to Section 80-IAC will limit its impact to a small section of startups.

"The relaxation for ESOP taxation was welcome but linking it to Sec 80-IAC makes it meaningless as it impacts only a 100 odd startups. We had requested for this to apply to all DPIIT (Department for Promotion of Industry and Internal Trade) registered startups. I do hope they correct that urgently," Indian Angel Network Chairman Saurabh Srivastava said in a statement.

During her Budget speech, Finance Minister Nirmala Sitharaman proposed easing of tax payments for startups - a decision which has been hailed by budding entrepreneurs.

"In order to give a boost to startup ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell, whichever is earliest," she said while presenting the Union Budget for 2020-21.

Employee stock option plan (ESOP) is a significant component of compensation for these employees, she said. Currently, it is taxable.

"This leads to cash flow problem for the employees who do not sell their shares immediately and continue to hold the same for long term," she said.

During their formative years, startups generally use ESOPs to attract and retain highly talented employees, she added.

Orios Venture Partners' Rehan Yar Khan said it is good that entry level capital gains had been differed to five year, exit or sale, whichever sooner. "Not Good: Yet need to pay entry level capital gains in 5 yrs if yet with company. The exemption only applies to Startups registered with IMB," he tweeted.

LocalCircles head Sachin Taparia tweeted: "This benefit seems to be extended to only startups incorporated after April 1, 2016. Needs to be extended to all startups that are eligible for #angeltax benefit. Also, need to make #esop taxable at sale without the 2 other conditions of 5 years or employee exit".