What are the income tax benefits under ESOP for any Startup?

To understand this, first we have to find out that what is Startup in the eyes of Indian government.  

An entity is Startup if :

1. It is incorporated as a private limited company or registered as a partnership firm or a limited liability partnership
2. Its turnover is less than Rs. 100 Crores in any of the previous financial years
3. It has not completed 10 years from the date of its incorporation
4. It is working towards innovation/ improvement of existing products, services and processes. Besides, it should have the potential to generate employment or create wealth.

Note: If any company has formed a new startup by splitting up its existing business, it won’t count to be treated as a startup. Also, if any of above condition is not fulfilled at any point of time, from that point of time, the entity would not be treated as Startup and will not get any benefit under the startup policy anymore.

If any startup has fulfilled the above criteria, it has to apply before DPIIT (Department for Promotion of Industry and Internal Trade, a department under ministry of Commerce and Industry) through online mode with required documents. DPIIT has to approve or reject the application. If it is approved, to get tax exemption under section 80IAC (inserted by the Finance Act, 2016, w.e.f. 01-04-2017), startup has to apply before Inter-Ministerial Board of Certification in specified application (Form-I) along with certain documents.

Now we have clearly understood that what is Startup and what is the process of getting certificate for tax exemption. Let’s understand what is ESOP?

ESOP:

Many companies are hiring highly qualified professionals as an employee. They have to pay high salary to these professionals being an employee and in turn the employee would have to pay higher income tax on his salary. Along with good salary package, companies offer ESOP to these employees. It gives ownership interest in that entity in the form of shares of stock.

Tax applicability and benefit:

Any person being an eligible startup, is responsible to pay/deduct income tax on the income being paid in the form of ESOP. Such income tax has to pay within 14 days:

a) after the expiry of 48 months from end of the relevant assessment year or

b) from the date of sale of such specified share by the assessee or

c) from the date of the assessee ceasing to be the employee of the person,

whichever is the earliest, on the basis of rates in force for the financial year in which the said

specified share is allotted or transferred.From above lines, it is cleared that the startup is not required to deduct TDS every year on allotted shares to the employees.