ESOP TDS Deferral Now 60 Months — But Only With Dual Certification
The Income Tax Act, 2025 extends the ESOP TDS deferral window for startup employees from 48 to 60 months, but the qualifying conditions have not loosened. Only startups holding both DPIIT recognition and IMB certification under Section 140 qualify — DPIIT recognition alone does not trigger the deferral, and employers without IMB certification must deduct TDS at exercise.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Section 392(3) read with Section 289(3), Income Tax Act, 2025 — Effective: AY 2026-27. Source: https://www.caclubindia.com/articles/esop-for-foreign-owned-indian-subsidiaries-tax-deferral-extended-to-60-months-in-2026-55829.asp. Last reviewed by CA Harun Raaj: September 2026.
Every AY 2026-27 ESOP filing season, the same misconception surfaces: "My company is DPIIT-recognised, so my ESOP TDS is automatically deferred." It is not. The Income Tax Act, 2025 extended the deferral window to 60 months — but the qualifying conditions have not changed. If your startup only has DPIIT recognition and is missing the second certification, your employer is obligated to deduct TDS at exercise, and your ITR must show the full perquisite in Schedule S.
This post explains what the 60-month deferral requires, who actually qualifies, and what to check before filing your AY 2026-27 return.
Key point: The 60-month ESOP TDS deferral under Section 392(3) of the Income Tax Act, 2025 applies only when a startup holds both DPIIT recognition and IMB certification under Section 140 — DPIIT recognition alone does not activate it.
Background: Why the ESOP TDS Deferral Exists
Startup employees face a cash problem at exercise. When they exercise their ESOPs, the perquisite — the difference between the Fair Market Value (FMV) of the shares on the exercise date and the exercise price — is taxed as salary income under Section 283(2)(vi) of ITA 2025 [formerly Section 17(2)(vi), ITA 1961]. For unlisted startups, the FMV can be high, the TDS liability is real, but the shares are illiquid. There is no sale event to fund the tax.
Finance Act 2020 introduced a TDS deferral for eligible startup employees. Finance Act 2026 (via the ITA 2025 framework) extended the deferral window from 48 months to 60 months.
What Changed Under ITA 2025: The 60-Month Window
Under Section 392(3) read with Section 289(3) of the Income Tax Act, 2025 (effective AY 2026-27), deferred TDS becomes payable at the first of these three events:
- 60 months from the end of the financial year in which the shares were allotted (extended from 48 months).
- Employee sells the shares.
- Employee leaves the company.
For practitioners: the old Section 192(1C) of ITA 1961 maps to Section 392(3) r/w Section 289(3) of ITA 2025. The IMB certification requirement is now governed by Section 140 of ITA 2025.
The Condition Most Founders Miss
The 60-month deferral applies only to employees of an "eligible startup" — defined under ITA 2025 as requiring both conditions simultaneously:
Condition 1 — DPIIT Recognition
Private Limited Company or LLP incorporated between 1 April 2016 and 31 March 2030, annual turnover below ₹100 crore, registered with DPIIT.
Condition 2 — IMB Certification (Section 140, ITA 2025)
A separate certificate from the Inter-Ministerial Board of Certification — the same IMB that certifies companies for the Section 80-IAC income-tax holiday. IMB certification is not automatic; it requires a separate application, business plan, and screening.
As of April 2026, fewer than 2% of DPIIT-recognised startups hold IMB certification.
DPIIT-Only vs DPIIT + IMB: What It Means for Your TDS
Practical Implications for AY 2026-27
If Your Employer Has Both DPIIT Recognition and IMB Certification
The employer does not deduct TDS at exercise. The perquisite appears in Form 16 as "deferred" with the Section 392(3) reference. In ITR-2 or ITR-3, it appears in Schedule S under the deferred column.If Your Employer Has Only DPIIT Recognition
The employer must deduct TDS at exercise. The perquisite is current-year salary, shown in Form 16 and Schedule S of ITR-2/ITR-3. If TDS was not deducted, the employee is personally liable and should have paid advance tax by 15 March 2026.Illustrative Example
TechCo Pvt Ltd is a Bengaluru-based SaaS company, DPIIT-recognised since 2021, with ₹18 crore annual revenue and 40 employees. In FY 2025-26, 8 employees exercised ESOPs at an FMV of ₹450 per share against an exercise price of ₹10 per share.
- Perquisite per share: ₹440, taxable as salary.
- TechCo does not have IMB certification.
- Result: TDS must be deducted at exercise. Each employee shows this in the AY 2026-27 ITR as salary income. No deferral applies.
Had TechCo obtained IMB certification, the 60-month deferral would have applied.
Practical Checklist
- Verify IMB status — ask your Company Secretary to produce the IMB certificate issued under Section 140, ITA 2025. If it does not exist, TDS deferral does not apply.
- Review Form 16 — check whether TDS was deducted at exercise or deferred.
- If no TDS was deducted and there is no IMB certificate — compute the perquisite, add it to Schedule S in your ITR, and reconcile advance tax. Interest under Section 234B may apply for underpayment.
- If deferred — note the triggering event date (60 months from the financial year-end of the allotment year) and plan for tax payment before that date.
- FMV for unlisted shares — a Category I Merchant Banker report per Rule 3(9), IT Rules 1962 is mandatory. Book value is not acceptable.
For ESOP tax planning including exercise timing, advance tax strategy, and Schedule FA disclosure for foreign ESOPs, use our free ESOP Tax Calculator.
Disclaimer: This post is for general information only. ESOP tax treatment depends on specific facts — consult a CA before making filing decisions.
I'm CA Harun Raaj, Visakhapatnam. If your startup's ESOP certification status is unclear, reach out and we'll check it before your filing deadline.
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See Also
Frequently Asked Questions
Does DPIIT recognition alone give the 60-month ESOP deferral?
No. DPIIT recognition is only Condition 1. IMB certification under Section 140 of the Income Tax Act, 2025 is Condition 2, and both are required simultaneously. The deferral itself is governed by Section 392(3) read with Section 289(3) of the Income Tax Act, 2025.
How does a startup apply for IMB certification?
The startup applies to the Inter-Ministerial Board of Certification at startupindia.gov.in, submitting a business plan, financial statements, and innovation credentials for the IMB to evaluate. This is a separate process from DPIIT registration, and IMB certification is not automatic.
What happens if my employer did not deduct TDS and the company has no IMB certification?
You are personally liable for the tax on the ESOP perquisite. Advance tax was due by 15 March 2026 for FY 2025-26 exercises, and interest under Sections 234B/234C applies for late payment. Consult a CA immediately to compute the correct liability.
Under ITA 2025, which section defines the ESOP perquisite?
Section 283(2)(vi) of the Income Tax Act, 2025 defines the ESOP perquisite, equivalent to Section 17(2)(vi) under the ITA 1961. The TDS deferral for eligible startups is separately covered under Section 392(3) read with Section 289(3) of ITA 2025.
When does the 60-month ESOP TDS deferral period end?
Deferred TDS becomes payable at the earliest of three events: 60 months from the end of the financial year in which the shares were allotted, the employee selling the shares, or the employee leaving the company.
What valuation method applies to ESOP shares in an unlisted startup?
A Fair Market Value report from a Category I Merchant Banker, prepared under Rule 3(9) of the IT Rules 1962, is mandatory for unlisted ESOP shares. Book value is not an acceptable substitute for this purpose.
Where does a deferred ESOP perquisite appear in my ITR?
For an eligible startup meeting both DPIIT and IMB conditions, the deferred perquisite appears in Form 16 as "deferred" with a Section 392(3) reference, and is shown under the deferred column of Schedule S in ITR-2 or ITR-3.
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