1. What does “TDS on ESOP perquisite” mean?
When you exercise Employee Stock Options (ESOPs), the difference between the Fair Market Value (FMV) of the shares and the exercise price is treated as a perquisite (a taxable benefit). Employers are normally required to deduct tax at source (TDS) on this perquisite amount.
2. What is the special TDS rule for eligible start-ups?
Under Section 192(1C) of the Income-tax Act, eligible start-ups can defer the timing of TDS deduction on the ESOP perquisite. Instead of deducting at exercise, they can deduct within 14 days after the earlier of certain events.
3. What are the events that trigger TDS deduction?
For eligible start-ups, TDS must be deducted within 14 days after the earliest of:
• Completion of 60 months (5 years) from the end of the financial year in which shares were allotted/transferred.
• Date of sale of the ESOP or sweat equity shares by the employee.
• Date of cessation of employment.
4. What is an “eligible start-up”?
A start-up is eligible for this ESOP TDS deferral if:
• It’s incorporated on or after 1 April 2016 and before 1 April 2023.
• Its total turnover doesn’t exceed ₹100 crore.
• It holds a certificate of eligible business from the Inter-Ministerial Board (central government).
5. Why is this benefit important?
This tax-deferral rule gives employees of eligible start-ups the breathing room to pay tax later, often at a point when they can actually sell shares or leave the company, reducing cash flow burden.
6. Does the deferral change the total amount of tax payable?
No. The total tax remains the same — it’s only the timing of TDS deduction that is deferred. Normal capital gains tax still applies at the time of sale of shares.
7. Is this benefit available to all start-ups?
No. Only those certified under Section 80-IAC (eligible start-ups) get this ESOP TDS deferral. There are many DPIIT-recognized startups, but far fewer meet the specific eligibility criteria for this tax benefit.
8. What happens if the employee leaves before 5 years?
If the employee’s job ends before five years, TDS must be deducted within 14 days after cessation of employment if that is the earliest event.
9. Who must deduct TDS — the employer or employee?
For ESOP perquisites, the employer (the start-up) is generally responsible for TDS deduction.
10. Should employees still report this in their tax return?
Yes. The perquisite value must be included in income and disclosed appropriately in the employee’s return. If too much TDS was deducted, a refund can be claimed at filing time.
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
