Govt Proposes Easing of Tax Payments for Startups in Budget 2020

Sitharaman proposed to ease the burden of taxation on the employees by deferring the tax payment by five years.

Employees who get ESOP schemes will get five years to pay tax on it.

Photo: The Quint

Finance Minister Niramala Sitharaman on 1 February 2020 proposed easing of tax payments for startups with a view to promoting the growth of budding entrepreneurs.

“In order to give a boost to startup ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell, whichever is earliest.” 

Finance Minister Nirmala Sitharaman

ESOP (employee stock option plan) is a significant component of compensation for these employees, she said while presenting the Union Budget for 2020-21.

Currently, ESOPs are taxable.

“This leads to cash flow problem for the employees who do not sell their shares immediately and continue to hold the same for the long term.”

Finance Minister Nirmala Sitharaman

She said startups have emerged as an engine of growth for India's economy and over the past year, the government has taken several measures to handhold them and support their growth.

‘Extend the Period of Eligibility for the Claim From 7 Years to 10 Years’

During their formative years, startups generally use ESOPs to attract and retain highly talented employees, she added.

Further, the minister said that an eligible startup having a turnover of up to Rs 25 crore is allowed a deduction of 100 percent of its profits for three consecutive assessment years out of seven years, if the total turnover does not exceed Rs 25 crore.

“In order to extend this benefit to larger startups also, I propose to increase the turnover limit from existing Rs 25 crore to Rs 100 crores.”

Finance Minister Nirmala Sitharaman

"Moreover considering the fact that in the initial years, a startup may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for the claim of deduction from the existing 7 years to 10 years," Sitharaman said.