Startup ESOP

ESOP tax deferral for startup employees

If the company is DPIIT-recognized and IMB-certified, the perquisite tax on your ESOPs can wait until you sell the shares, leave the company, or the time limit ends. You do not pay that tax on the day you exercise. The dates below are for FY 2026-27. The founder guide puts the same windows next to salary and a share sale.

Official sources

Employee benefits (page labelled AY 2026-27). ESOP and sweat equity: the perquisite is the fair market value of the shares on the date you exercise, minus the amount recovered from you. A Finance Act, 2020 note on that page defers startup perquisite tax from the date of allotment to the earliest of three dates: 48 months from the end of the relevant assessment year, sale of the shares, or the date you stop being an employee of the startup. That note does not state a 60-month window.
Income-tax Act, 2025 (CBDT hub), for the Act text that applies when you file.
Form 26AS, where salary TDS is shown once the employer deducts it.

What deferral does

When you exercise ESOPs, fair market value (FMV) minus the price you pay is a perquisite. Without deferral, that amount is taxed in the year you exercise, even though you have not sold the shares.

Without deferral

FMV ₹500, exercise price ₹10. The perquisite is ₹490 a share. Tax is due in that year, before any sale. You need cash for tax on shares you still hold.

With deferral

Same exercise. The perquisite tax waits for a trigger: you sell, you leave, or the time limit ends. You hold the shares without paying that tax on the exercise date.

Who qualifies

Deferral is not open to every ESOP holder. The startup and the employee both have to qualify.

✓ Startup is DPIIT-recognized

✓ Startup is IMB (Inter-Ministerial Board) certified

✓ ESOPs are from the eligible startup (not a different company)

✓ Employee is a resident Indian

DPIIT recognition is not enough

The startup also needs IMB certification. Many DPIIT-recognized startups do not have it. Check the certificate before you assume the tax can wait.

48 months or 60 months

The length of the window depends on when the shares were allotted. The two windows also start on different days.

Allotment before 1 Apr 2026

48 months

from the end of the relevant assessment year

Exercise in FY 2024-25. AY 2025-26 ends 31 Mar 2026. Window ends 31 Mar 2030.

Allotment on or after 1 Apr 2026

60 months

from the end of the FY of exercise

Exercise in FY 2026-27. Window ends 31 Mar 2032.

Why the two windows differ

Budget 2025 extended the window from 48 months to 60 months for allotments on or after 1 Apr 2026. For an earlier allotment, the employee-benefits note counts 48 months from the end of the relevant assessment year. That year is the one after the financial year in which you exercise. The note does not state the 60-month window. For an allotment on or after 1 Apr 2026, count 60 months from the end of the financial year of exercise.

When the tax is due

Deferral ends, and the perquisite tax becomes payable, on the earliest of these events:

Sale of shares

You sell the ESOP shares. Perquisite tax is payable in the year of sale.

You leave

You leave the company. Perquisite tax is payable in the year you leave.

Time limit

The 48-month or 60-month window ends. Perquisite tax is payable then, even if you still hold the shares.

Example: You exercise in FY 2024-25, and the shares were allotted before 1 Apr 2026. The relevant assessment year is 2025-26, which ends on 31 Mar 2026. Forty-eight months from that date is 31 Mar 2030. If you have not sold the shares or left by then, the perquisite tax is payable in AY 2029-30.

TDS

While deferral applies, the employer does not deduct TDS on the perquisite at exercise. TDS is deducted when a trigger event happens.

Event	TDS Action
Exercise (deferral period)	No TDS deducted
Sale / cessation / time expiry	TDS deducted on full perquisite

Cash when the trigger hits

You do not need cash for perquisite tax on the exercise date. When a trigger happens, the full perquisite tax is due, often in one amount. Keep that cash aside. The deduction, once made, is on Form 26AS.

More than one batch

Many employees have ESOPs from more than one year. A batch allotted before 1 Apr 2026 uses the 48-month window. A batch allotted after that date uses the 60-month window. Each batch has its own end date.

Allotment Batch	Window	Example Deadline
Batch 1: FY 2023-24 (exercised)	48 months from end of relevant AY	31 Mar 2029
Batch 2: FY 2026-27 (exercised)	60 months from FY end	31 Mar 2032

Each batch has its own date

The first window to end triggers tax on that batch, not on the later batch. Plan the sale, or the cash, around each date. Batch 1: exercise in FY 2023-24, relevant AY 2024-25 ends 31 Mar 2025, plus 48 months is 31 Mar 2029.

Before you exercise

The tax is postponed. It is still due later. The timing of exercise changes the slab it sits in.

Do this

✓ Exercise when other income is low (sabbatical, startup ramp)
✓ Hold at least 24 months after exercise for long-term capital gains (12.5% instead of slab)
✓ Track each batch's trigger date separately
✓ Set aside cash for perquisite tax when a trigger happens

Don't do this

✗ Exercise when salary is already high (higher slab and surcharge)
✗ Ignore the window expiry. Tax is due even if you do not sell
✗ Treat deferral as cancelled tax. It is only postponed
✗ Skip the check for IMB certification

Estimate the tax

The ESOP tax calculator estimates perquisite tax, the deferral window, and capital gains.

ESOP Tax Calculator →