Startup management says that ESOPs are currently subject to double taxation, which makes them less tax-friendly. According to current regulations, ESOPs are subject to income tax when they are exercised and capital gains tax when employees sell them.

ESOPs are typically issued by businesses to draw and keep talent in the Indian startup scene. The vesting period for these instruments is four years. When firms earn money through several rounds, employees can cash those options or exercise them by converting them to shares.

These shares are vested in liquidity events including public offerings, secondary transactions, and Esop buybacks in the case of unlisted enterprises.

These shares are taxed according to the employee’s slab under the Income Tax Act and are regarded as salary income when they are cashed. Depending on how long they retain the stock, employees may potentially be subject to capital gains tax.

Additionally, entrepreneurs anticipate that the income deferment policy, which was first implemented in 2020, would be expanded in the next budget. If this policy is put into effect, certain startup employees will not be required to pay income tax while exercising their ESOPs.

One of the best years for Indian entrepreneurs to go public was last year. Last year, over a dozen businesses went public on the Indian market. This was the time when a number of startups made their successful debuts, including Swiggy, Ola Electric, FirstCry, and Go Digit General Insurance.