TDS On ESOP Prerequisite By Eligible Start-Ups

Introduction

The Income-tax Act, 1961 provides provisions for the deferral of the timing of Tax Deducted at Source (TDS) deduction on Employee Stock Ownership Plan (ESOP) prerequisites for employees. This article explores Section 192(1C) of the Income-tax Act, which permits eligible start-ups to deduct or pay tax on the ESOP perquisite within 14 days of specified events. The criteria for being an “eligible start-up” and the benefits associated with this provision will be discussed.

Deferral of TDS Deduction on ESOP Prerequisite

Section 192(1C) of the Income-tax Act allows eligible start-ups, as defined under Section 80-IAC, to defer the deduction of TDS on ESOP prerequisites for their employees. The provision outlines three specific events that trigger the timing of TDS deduction, and the earliest of these events determines the timeline for tax payment. The specified events are as follows:

1. Completion of 60 months from the end of the relevant financial year in which ESOP shares are allotted or transferred.
2. Date of sale of ESOP or sweat equity shares by the employee.
3. Date of cessation of employment of an employee with the relevant start-up.

Eligibility Criteria for Start-ups

To qualify as an “eligible start-up” under Section 80-IAC, a company or a limited liability partnership (LLP) must meet the following conditions:

a) Incorporation Date: The start-up must be incorporated on or after April 1, 2016, but before April 1, 2023.

b) Total Turnover: The total turnover of the start-up’s business should not exceed Rs 100 crore.

c) Certificate of Eligible Business: The start-up must hold a certificate of eligible business issued by the Inter-Ministerial Board of Certification, as notified in the Official Gazette by the central government.

Benefits for Eligible Start-ups

The deferral of payment of tax on ESOP prerequisites is available exclusively for employees of eligible start-ups. Although there are more than 88,000 start-ups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), only 993 meet the criteria outlined in Section 80-IAC of the Income-tax Act. These eligible start-ups can take advantage of the deferred payment of tax, providing a significant benefit to their employees.

Conclusion

The Income-tax Act, 1961 offers eligible start-ups the opportunity to defer the timing of TDS deduction on ESOP prerequisites for their employees. By complying with the provisions of Section 192(1C) and fulfilling the eligibility criteria under Section 80-IAC, start-ups can ensure timely tax payment while providing a valuable benefit to their employees. As the start-up ecosystem continues to grow, understanding and leveraging such provisions becomes crucial for both start-ups and their employees.