ESOP Tax Deferral Under ITA 2025: The 60-Month Window Explained
The Income-tax Act 2025 carries the startup ESOP TDS deferral into s.392(3) and s.289(3): 60 months from the end of the tax year, the same date the old 48-month rule reached. Who qualifies and when tax falls due.
CA Harun Raaj
pvtltd.co
The Income-tax Act, 2025 (in force from 1 April 2026 — s.1(3)) carries forward the ESOP TDS deferral for startup employees under new section numbers: s.392(3) read with s.289(3) (successors to s.192(1C) of the 1961 Act). The window is now worded as 60 months from the end of the tax year instead of 48 months from the end of the assessment year — but 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.
The relief comes with a strict eligibility condition that most founders misunderstand, and getting it wrong exposes the company to TDS defaults and employees to unexpected tax demands.
Why ESOP taxation creates a cash crisis
When you exercise an ESOP, you receive no cash — only shares. Yet the Act treats the difference between the fair market value (FMV) on the exercise date and your exercise price as a perquisite: "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 a mid-level startup employee exercising ₹50 lakh worth of options, the slab-rate tax on the perquisite can run to ₹15–20 lakh with zero liquidity to pay it.
The deferral provision was designed to solve this: where the employer is an eligible start-up, the employer deducts or pays tax "within the time as specified for the payee in section 289(3)" — i.e. within fourteen days of the earliest trigger — instead of at exercise (ss.392(3), 289(3), ITA 2025).
The eligibility condition
The deferral under s.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 (s.140, ITA 2025):
- Incorporated on or after 1 April 2016 but before 1 April 2030;
- Total turnover of its business not exceeding one hundred crore rupees in the relevant tax year; and
- Holding a certificate of eligible business from the Inter-Ministerial Board of Certification, as notified by the Central Government.
Critical: the statute tests the employer against s.140 — it does not mention DPIIT recognition. Do not assume DPIIT recognition alone activates the deferral. Verify the company's s.140 position (including a current IMB certificate) with your CA or CFO before assuming eligibility.
What changed under ITA 2025 — and what did not
Allotments before 1 April 2026 were governed by the 1961 Act (which covered previous years relevant to assessment years beginning on or after 1 April 2021); allotments on or after 1 April 2026 fall under the 2025 Act. The deadline lands on the same date either way.
Key point: the eligibility test in s.140 has not loosened, and the window has not lengthened in substance. What changed are the section numbers and the wording of the window.
Who must take action before AY 2026-27
Startup employees exercising ESOPs in FY 2025-26: report the perquisite income (FMV minus exercise price) under the Salary head. If your employer applied deferral, confirm the employer was an eligible start-up under s.140. Check Form 16 — if the perquisite is missing, raise it with the employer before filing. Note the AY 2026-27 due dates (31 July 2026, or 31 August for non-audit cases) have passed, so pending returns are belated with late-fee consequences.
Payroll and HR teams at eligible startups: reflect deferral status and triggering events in payroll records and Form 16. Track each employee's window (60 months from the end of the allotment tax year) and log trigger events (share sales, resignations, window expiry) — TDS must follow within fourteen days of the trigger.
Founders and company secretaries allotting new ESOPs on or after 1 April 2026: update scheme documents to reference ss.392(3)/289(3) of ITA 2025 and state the s.140 eligibility basis. References to 1961 Act sections are stale from 1 April 2026.
Practical compliance checklist
- Verify s.140 eligibility: confirm the incorporation window, the ₹100-crore turnover condition, and a current IMB certificate — not DPIIT recognition alone.
- Identify the allotment date: it fixes the rate year under s.392(3) (rates in force for the tax year of allotment or transfer).
- Calculate perquisite income: FMV on the exercise date minus exercise price. For unlisted shares, FMV is "such value of the share in the company as determined by a merchant banker on the specified date" — 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).
- File ITR correctly: report the perquisite under Salary. Cross-check Form 16 from your employer.
- Track trigger dates: document when each 60-month window ends and log sales and exits. Tax is payable within fourteen days of the earliest trigger — not seven.
FAQ
My startup has DPIIT recognition but no IMB certificate. Can I defer TDS on ESOP exercise?
The statute requires the employer to be an eligible start-up under s.140, which includes holding an IMB certificate — DPIIT recognition is not the statutory test. Without s.140 eligibility, the deferral does not apply. Confirm the company's position with your CA before exercising.
I was allotted ESOPs in February 2026. Does the 60-month or 48-month window apply?
Pre-April 2026 allotments were governed by s.192(1C) of the 1961 Act (48 months from the AY-end); post-April 2026 allotments fall under s.289(3) (60 months from the tax-year-end). Both wordings reach the same calendar date, so the distinction does not change your deadline.
At what rate is TDS computed when the deferral ends?
On the basis of the rates in force for the tax year in which the shares were allotted or transferred (s.392(3)) — not the rates in the trigger year.
I left my startup before the window ended. What happens?
Ceasing employment is a trigger: tax becomes payable within fourteen days of the date you ceased to be an employee (s.289(3)(c)). The perquisite value and rate year do not change — they were fixed at exercise/allotment.
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).
If I sell my shares during the deferral window, when is tax due?
Sale is a trigger: the window ends and tax on the perquisite is payable within fourteen days of the sale date (s.289(3)(b)).
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See Also
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