ESOP Tax Deferral Under ITA 2025: 60-Month Rule Replaces Section 192(1C)
ITA 2025 restates the startup ESOP deferral as 60 months from the end of the tax year — the same date as the old 48 months from AY end. Employer must be an s.140 eligible start-up holding an IMB certificate.
CA Harun Raaj
pvtltd.co
The Income-tax Act, 2025 (in force from 1 April 2026 — s.1(3)) renumbers the ESOP tax-deferral provisions that startup employees relied on under the 1961 Act. The deferral survives, but under new section numbers and with one wording change founders should understand: the window is now stated as 60 months from the end of the tax year instead of 48 months from the end of the assessment year. Because an assessment year ends 12 months after its previous year, both wordings reach the same calendar date — there is no extra year of deferral.
If your startup employees exercised ESOPs in FY 2025-26 — or you are planning fresh ESOP grants in Tax Year 2026-27 — this guide sets out the position under the new law and the eligibility conditions you must satisfy.
Why ESOP deferral exists
When an employee exercises stock options, the spread between the fair market value (FMV) at exercise and the exercise price is a taxable perquisite under s.17(1)(d) of the Income-tax Act, 2025 — "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the current employer, or former employer, free of cost or at concessional rate to the assessee" (s.17(1)(d), ITA 2025).
For employees of listed companies, the tax is manageable: shares can be sold on the exchange to fund the liability. For startup employees, shares are illiquid. The deferral (old s.192(1C), ITA 1961; now s.392(3) read with s.289(3), ITA 2025) addresses this by delaying the employer's TDS deposit obligation where the employer is an eligible start-up.
What changed on 1 April 2026 — and what did not
Allotments before 1 April 2026 were governed by s.192(1C) of the 1961 Act; allotments on or after 1 April 2026 fall under ss.392(3)/289(3) of the 2025 Act. The deadline lands on the same date either way — for example, a May 2026 allotment reaches the end of its window on 31 March 2032 under both wordings (see the example below).
Key point: DPIIT recognition alone does not trigger the deferral. The employer must be an "eligible start-up" referred to in s.140 — which means holding a certificate of eligible business from the Inter-Ministerial Board of Certification (s.140, ITA 2025).
The eligibility condition
Section 392(3) applies where the shares are allotted or transferred "by the current employer, being an eligible start-up referred to in section 140" (s.392(3), ITA 2025). Section 140 defines "eligible start-up" as a company or LLP engaged in eligible business which fulfils all of these conditions (s.140, ITA 2025):
- Incorporated on or after 1 April 2016 but before 1 April 2030;
- The total turnover of its business does not exceed three hundred crore rupees in the tax year relevant to the tax year for which deduction under sub-section (1) is claimed (s.140(16)(b)(ii), as amended by Finance Act, 2026, s.46 substituting "three" for "one"); and
- Holding a certificate of eligible business from the Inter-Ministerial Board of Certification, as notified by the Central Government.
If the employer is not an eligible start-up at the relevant time, the deferral does not apply and normal salary-TDS timing governs.
When deferred tax becomes due
Under s.289(3), the tax or interest on the ESOP income included in the notice of demand "shall be payable by the assessee within fourteen days" of the earliest of (s.289(3), ITA 2025):
- (a) the expiry of sixty months from the end of the relevant tax year;
- (b) the date of the sale of the shares by the employee; or
- (c) the date the employee ceases to be employed by the employer who allotted or transferred the shares.
Section 392(3) requires the eligible start-up employer to deduct or pay tax "within the time as specified for the payee in section 289(3)", and the deduction is computed "on the basis of rates in force for the tax year in which the specified security or sweat equity share is allotted or transferred" (s.392(3), ITA 2025). This is a material planning point: the TDS is computed at the allotment-year rates, not the rates in force at the trigger event.
The perquisite value itself is fixed with reference to the exercise date: for unlisted shares, the FMV is "such value of the share in the company as determined by a merchant banker on the specified date" (Rule 15(6)(d), Income-tax Rules 2026). "Merchant banker" means a Category I merchant banker registered with SEBI (Rule 15(8)(g)), and the "specified date" is the exercise date or any date not more than 180 days earlier (Rule 15(8)(l)).
Illustrative example
TechCo Private Limited is a Bengaluru-based SaaS startup that is an eligible start-up under s.140 (incorporated after 1 April 2016, turnover below ₹300 crore, holding an IMB certificate). In Tax Year 2026-27 (May 2026), the company allots 500 options to a senior developer. FMV at exercise (determined by a Category I merchant banker) is ₹2,000 per share; exercise price is ₹50.
- Perquisite value: (₹2,000 – ₹50) × 500 = ₹9,75,000
- Window: 60 months from the end of Tax Year 2026-27 (i.e., from 31 March 2027), ending 31 March 2032
- Tax payable: within fourteen days of the earliest of 31 March 2032, a sale of the shares, or cessation of employment — so the outer date is about mid-April 2032, not 31 March 2032
- TDS rate: the rates in force for Tax Year 2026-27, the year of allotment
This is an illustrative example only. Individual positions may differ based on circumstances and CBDT guidance.
Practical compliance checklist
- Confirm eligible-start-up status. The employer must satisfy s.140 (incorporation window, ₹300-crore turnover condition, IMB certificate). DPIIT recognition alone is not the statutory test.
- Document each allotment. Record the allotment date in the ESOP allotment letter and board resolution — it fixes the rate year under s.392(3).
- ITR filing for employees (AY 2026-27). Employees who exercised ESOPs in FY 2025-26 at non-eligible startups must report the perquisite in the AY 2026-27 return. The due dates of 31 July 2026 (and 31 August for non-audit cases) have passed, so pending returns are belated with late-fee consequences. Check Form 16 carefully — if the perquisite is missing, raise it with the employer before filing.
- Exit modelling. Model the TDS liability well before any trigger event. The tax hit at sale, resignation, or expiry of the 60-month window can be material.
- Update ESOP documentation. New grants (Tax Year 2026-27 onward) should reference ITA 2025 section numbers (ss.17(1)(d), 289(3), 392(3)) in plan documents and employment agreements. References to ITA 1961 sections are stale from 1 April 2026.
FAQ
Has the deferral window really been extended from 48 to 60 months?
No. The old law said 48 months from the end of the assessment year; the new law says 60 months from the end of the tax year. Since an assessment year ends 12 months after its previous year, both wordings produce the same calendar date.
Which section taxes the ESOP perquisite under the new Act?
Section 17(1)(d) — the value of specified securities or sweat equity shares allotted or transferred by the employer free of cost or at a concessional rate. (Section 289(1) is only the notice-of-demand machinery.)
How is FMV determined for unlisted startup shares?
By a Category I merchant banker registered with SEBI, on the exercise date or a date not more than 180 days earlier (Rule 15(6)(d), 15(8)(g), 15(8)(l), Income-tax Rules 2026).
At which year's rates is the deferred TDS computed?
The rates in force for the tax year of allotment or transfer (s.392(3)) — even if the trigger event (sale, exit, or 60-month expiry) falls in a later year.
What ends the deferral?
The earliest of: expiry of 60 months from the end of the tax year, sale of the shares, or ceasing employment — with tax payable within fourteen days of that date (s.289(3)).
See also
- SEBI Reviews SME Capital-Raising Framework in FY 2026-27
- Angel Funds: Accredited-Investor-Only Deadline 8 Sept 2026
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See Also
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