The Dual-Taxation Problem
Employee Stock Ownership Plans (ESOPs) are the most powerful tool for attracting top-tier talent to early-stage startups. However, the Indian tax code taxes ESOPs at two distinct events, which can severely impact your employees if not structured correctly.
- Event 1 (Exercise): When options are converted to shares. Taxed as 'Perquisite' under Salary.
- Event 2 (Sale): When shares are eventually sold. Taxed as 'Capital Gains'.
Startups registered under DPIIT (Startup India) can defer the tax burden on the 'Exercise' event for up to 48 months, or until the employee leaves the company.