Startup Founder Raises Concerns Over ESOP Taxation, Says Rules Limit Employee Wealth Creation in India

A renewed debate over employee stock ownership in India’s startup ecosystem has emerged after entrepreneur Chinmay Singh raised concerns about the country’s taxation framework for employee stock ownership plans (ESOPs).

In a post on the social media platform X, Singh argued that the current tax treatment of ESOPs makes it challenging for startups to provide meaningful equity ownership opportunities to employees, particularly those working outside major technology hubs.

Sharing his experience of building a US-based startup, Singh said his company recruited engineers from smaller towns and villages across states including Uttar Pradesh, Bihar and Assam. He said the focus was on hiring skilled professionals regardless of location and compensating them at levels comparable to employees in larger cities.

However, Singh said he was unable to extend the same equity participation opportunities to India-based employees that were available to staff in the United States. According to him, India’s tax framework creates financial hurdles for employees who choose to exercise their stock options.

Under the current tax regime, employees may be required to pay tax when stock options are exercised and converted into shares. The taxable amount is generally calculated as the difference between the exercise price and the fair market value of the shares at the time of exercise. This tax liability can arise even when the shares belong to a privately held company and may not be readily liquidated.

Singh argued that the system effectively requires employees to pay taxes on gains that have not yet been realised in cash terms. He contrasted this with the US approach, where employees are typically taxed when they sell their shares, allowing them to realise value before incurring a tax obligation.

The comments have revived discussions among startup founders and industry stakeholders regarding potential reforms to India’s ESOP taxation framework. Proponents of change have long argued that taxing stock-based gains at the point of sale, rather than at the time of exercise, could make employee ownership more attractive, strengthen startups’ ability to compete for talent, and promote broader wealth creation.