In our previous post, we looked problem of paying taxes on ESOPs before you’ve actually made any money from them. For most employees, this is a major hurdle.

However, if you are part of a registered startup, the rules change in your favor. Here is how the government has eased the burden for the startup ecosystem.

Under standard rules, you must pay “Perquisite Tax” the moment you exercise your options. For employees of Eligible Startups, this tax liability is deferred. You still exercise your options and get your shares, but you don’t have to pay the tax or employer does not have to deduct TDS immediately.

The tax “alarm” only goes off within 14 days from the occurring of earliest of these three events:

1. Five years from the end of the financial year in which options are exercised.
2. Date of sale of security / shares received on exercise of options.
3. Date of taxpayer ceasing to be an employee of the employer who allotted him shares / sweat equity shares.

This effectively allows you to hold your shares “tax-free” for up to 5 years, or until you have actual cash in hand from a sale.

Is Your Startup “Eligible”?

It’s important to note that not every startup qualifies for this specific tax holiday. The relaxation is available only if the Startup is recognized by the DPIIT and is eligible for claiming tax holiday under the Income-tax provisions.