ESOP · Startup Tax · Founder Compliance
ESOP Tax Deferral Just Got a Year Longer. Is Your Grant Letter Up to Date?
Under the Income Tax Act, 2025, employees of eligible startups can now defer tax on their exercised ESOPs for 60 months instead of 48. If your ESOP documents still say 48, they are describing a rule that no longer applies to shares allotted from 1 April 2026 onward.
Here is what actually changed, and why it matters.
A quick refresher: how ESOP tax actually works
An ESOP gives an employee the right to buy company shares at a fixed price, usually well below what those shares are worth once the company grows. This happens in two steps. First, the employee exercises the option, paying the fixed price to actually receive the shares. Later, the employee sells those shares, hopefully at a higher price.
Tax applies at both steps, not just at sale. At exercise, the difference between the market value of the shares and the price the employee paid is treated as a perquisite, taxed like salary. At sale, whatever the employee gains is taxed separately as a capital gain. The exercise-stage tax is the tricky part, because the employee has not actually received any cash at that point; they have only converted an option into shares they are still holding.
What deferral does, and what changed
For employees of DPIIT-recognised, 80-IAC certified startups, the law allows the exercise-stage tax to be paid later rather than immediately, so the employee is not forced to find cash before they have actually sold anything.
Under the earlier Income Tax Act, 1961, that deferral window was 48 months from the end of the assessment year of allotment, or the date of sale, or the date the employee left the company, whichever came first. Under the Income Tax Act, 2025, effective from 1 April 2026, that window is now 60 months, under Section 392(3) read with Section 289(3), for shares allotted on or after that date. Shares allotted before 1 April 2026 continue to follow the older 48-month rule.
In one line
Employees now get one extra year before the deferred exercise-stage tax comes due, but only for shares allotted from 1 April 2026 onward, and only at startups holding both DPIIT recognition and an 80-IAC (now Section 140) certificate.
What founders should actually check
- Confirm your company holds a current DPIIT recognition and an Inter-Ministerial Board (IMB) certificate under Section 140. Without both, this deferral does not apply at all.
- Update grant letters, ESOP scheme documents and board resolutions for any allotment made on or after 1 April 2026, so they reflect 60 months, not 48.
- Brief HR and finance before the next exercise event, so no employee is told the wrong deferral period by mistake.
- Remember that shares allotted before 1 April 2026 still run on the 48-month clock; the two rules coexist for a while.
Frequently asked questions
Do I pay tax on my ESOPs only when I sell them?
No. Tax applies twice: once at exercise (perquisite tax, treated like salary), and again at sale (capital gains tax on any further profit).
What did the Income Tax Act, 2025 actually change for ESOPs?
It extended the deferral window for the exercise-stage tax from 48 months to 60 months, for eligible startup employees, for shares allotted on or after 1 April 2026.
Does every startup employee get this benefit?
No. Only employees of startups that are both DPIIT-recognised and hold an 80-IAC (Section 140) certificate from the Inter-Ministerial Board.
Which shares get the new 60-month window, and which stay at 48?
Shares allotted on or after 1 April 2026 fall under the new 60-month rule. Shares allotted before that date continue under the older 48-month rule, so both timelines can apply within the same company at the same time.
What actually triggers payment of the deferred tax?
Whichever comes first: 60 months from the end of the tax year of allotment, the date the employee sells the shares, or the date the employee leaves the company.
Does the tax rate change if the deferral runs the full 60 months?
No. The tax is calculated at the rate in force for the year the shares were allotted, not the year the deferral ends, so a later slab change does not retroactively help or hurt the employee.
What is the exact legal basis for this change?
Section 392(3) read with Section 289(3) of the Income Tax Act, 2025, which succeeds Section 192(1C) of the 1961 Act. Eligibility continues to require certification under Section 140 of the 2025 Act, the successor to Section 80-IAC, along with DPIIT recognition.
Does this apply to ESOPs granted on shares of a foreign parent company?
This specific deferral provision is tied to DPIIT-recognised, Section 140 certified Indian startups. ESOPs on foreign parent company shares follow separate perquisite and reporting rules, including FEMA classification as Overseas Portfolio Investment, and do not automatically qualify for this deferral.
Do older ESOP scheme documents need to be reissued, or just referenced correctly going forward?
Existing grants under the 48-month rule remain valid as they are. What needs updating is any new grant letter, scheme document or board resolution used for allotments from 1 April 2026 onward, so it correctly states the 60-month window rather than repeating outdated section numbers or timelines.
The takeaway
An extra year of deferral is a real benefit for your employees, but only if your paperwork actually reflects it. A grant letter still quoting 48 months for shares allotted after 1 April 2026 is not just outdated; it understates what your employees are entitled to.
If you want your ESOP documents checked against the current 60-month rule, MOJAA can review them with you. Get in touch here.
This article reflects publicly available regulatory information as of September 2026 and is intended for general information only. It does not constitute tax or legal advice. Founders should verify current eligibility and documentation requirements before acting on it.