On 2 Feb’20, Finance Minister Nirmala Sitharaman presented the Union Budget 2020-21 in the Lok Sabha. This year’s Union Budget centers around three ideas; Aspirational India, Economic development, A Caring Society.
But what caught many’s attention is that in the budget introduced, Nirmala Sitharaman proposed deferring the tax payments on ESOPs by five years or till the employees leave the company or sell their shares, whichever is the earliest.
While speaking on the ESOP rules, Sitharaman said,
During their formative years, startups generally use ESOPs to attract and retain highly talented employees. ESOPs are a significant component of the compensation of these employees. Currently, ESOPs are taxable. This leads to a cash flow problem for the employees who do not sell their shares immediately and continue to hold them for the long term.
As per the new rules announced by Finance Minister Nirmala Sitharaman, the stocks would be taxed at the time of their sale, or 5 years after vesting, or when an employee leaves a startup, whichever comes first. This avoided double taxation for startup employees.
Many startup founders were all praises for the new ESOP rules and showed in their recent tweets.
Vijay Shekhar – Paytm Founder
Very happy and thankful to ESOP related changes done by Fin Min @nsitharaman madam.
Beautifully defined and sorts out many issues. 🙏🏼🙏🏼— Vijay Shekhar (@vijayshekhar) February 1, 2020
Sanjay Swamy – Managing Partner at Prime Venture Partners
ESOPS: Tax at the time of sale or at end of 5 years or when employee leaves startup. Whichever 1st.
Removes the double tax on ESOPs.
Solves a key issues for Startups attarcting quality talent. @IndianVCA @letsventurein @SidPai275
— Rehan Yar Khan (@rehanyarkhan) February 1, 2020
Kunal Bahl – Snapdeal CEO
ESOP tax reform is here. Big win for the startup ecosystem! 🙏🏼 @nsitharaman #BudgetSession2020 https://t.co/VA4uQMssUp
— Kunal Bahl (@1kunalbahl) February 1, 2020
Sharing her views on the Budget 2020, Biocon MD, Kiran Majumdar Shaw tweeted:
Although my immediate response to the budget was satisfactory, now that I’ve read the fine print I must say I’m less optimistic about strong economic revival. In fact removal of exemptions n DDT will hurt individual tax payer n affect consumer spending. Why no export incentives?
— Kiran Mazumdar-Shaw (@kiranshaw) February 1, 2020
In addition to this, the Finance Minister has also proposed a 100% deduction of profits for three consecutive assessment years out of seven for eligible startups having turnover of up to Rs 25 crore.
