Union Budget 2026: More companies may be able to take advantage of the Esops tax delay

Centre may extend ESOP tax deferral to all DPIIT-recognised startups

The Centre is considering extending tax deferral on employee stock option plans (Esops) to all startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), according to people familiar with the matter. Currently, the four-year tax deferral benefit is available only to startups certified by an Inter-Ministerial Board (IMB).

As of October 31, 2025, DPIIT had recognised about 1.97 lakh startups, compared with around 4,000 that have IMB certification. If implemented, the move would significantly broaden the scope of Esop tax relief ahead of the upcoming Union Budget.

“We are looking at the issue before the budget,” an official said, adding that a final decision will be taken after internal deliberations.

What the current rule allows

The Esop tax deferral was introduced in 2020 to ease the tax burden on employees of eligible startups. Under the provision, startups holding an eligibility certificate under Section 80-IAC of the Income Tax Act can defer perquisite tax on Esops for up to four years, instead of taxing employees at the time of exercise. These startups are also allowed to carry forward losses, provided shareholders with voting rights remain unchanged during the relevant period.

Officials said the IMB certification process has been streamlined in recent years, becoming more objective and faster, leading to a rise in certified startups from a handful earlier to around 4,000 now.

Long-standing industry demand

The startup and venture capital ecosystem has repeatedly sought rationalisation of Esop taxation to avoid what it describes as double taxation. Under the current regime, employees pay income tax when they exercise their Esops—based on the difference between fair market value and exercise price—and later pay capital gains tax when they sell the shares.

Industry representatives have also asked for clarity on whether Esop costs can be deducted as employee compensation expenses by companies, and for easier carry-forward of losses and depreciation during corporate restructuring.

The issue has gained urgency as more new-age companies prepare for public listings. According to industry estimates, IPOs by startups in 2025 unlocked Esop pools worth nearly Rs 8,700 crore, or about $1 billion.

“In most foreign jurisdictions, Esops are taxed only at the time of sale,” a startup founder told ET. “In India, the tax burden at the time of exercise can be very heavy, especially if share prices rise sharply by the time lock-in periods end.”

If the proposed extension is approved, it could provide significant relief to employees and startups alike, while aligning India’s Esop taxation framework more closely with global practices.