The scale of the cleanup is significant. The Act has been compressed from roughly 800+ sections across 47 chapters to 536 sections across 23 chapters. The Income Tax Rules, 1962, which ran to 500+ rules, are simultaneously replaced by the Income Tax Rules, 2026 with just 333 rules. Provisos within provisos, explanations within explanations, gone. Plain language throughout.

Here is everything you need to know, broken down by who you are.

The Structural Shifts

“Tax Year” replaces Previous Year and Assessment Year

The old system, where you earned income in the Previous Year 2025-26 and got assessed in Assessment Year 2026-27, is gone. From 1 April 2026, the year in which you earn income is simply the Tax Year. Tax Year 2026-27 runs from 1 April 2026 to 31 March 2027. This eliminates a long-running source of confusion, especially in multi-year legal documents and fund agreements.

All section references are now stale

Every SHA, PPM, contribution agreement, ESOP scheme document, tax opinion, employment agreement, or compliance checklist that cites a section of the Income Tax Act, 1961 carries an invalid reference from 01 April 2026. This is not a tax change, but it is a real documentation task. Start the audit now.

Two frameworks run in parallel for now

The new Act governs income earned from 1 April 2026 onwards. All pending assessments, appeals, and proceedings relating to earlier years continue under the 1961 Act. Returns for FY 2025-26, filed in July 2026, are still filed under the old Act. Your first return under the Income Tax Act, 2025 will be filed in July 2027.

For Founders and Startups

Startup tax holiday: incorporation deadline extended

Eligible startups can claim a 100% profit deduction for any three consecutive years within the first ten years of incorporation. The eligibility cut-off for incorporation has been extended to April 1, 2030, from the earlier April 1, 2025. If your startup was incorporated after April 2025 and fulfils the eligibility criteria, you now qualify. Verify eligibility with your tax advisor, as conditions around DPIIT recognition and business type still apply.

ESOPs: no change in tax treatment

Perquisite valuation at exercise is unchanged. ESOPs continue to be taxed as a perquisite in the hands of the employee at the time of exercise, based on fair market value minus the exercise price. However, ESOP scheme documents and employment agreements referencing old section numbers will need to be updated.

For HNIs and Angel Investors

Capital gains: rates and holding periods unchanged

Short-term capital gains on equity remain at 20%. Long-term capital gains on equity remain at 12.5%, with a Rs. 1.25 lakh annual exemption. The provisions are now consolidated under Clauses 67 and 196-198. No substantive change, but your references in filings will need to reflect the new clause numbers.

Buyback proceeds: now taxed as capital gains, not dividends

This is a Budget 2026 change now coming into effect. Previously, buyback proceeds were treated as deemed dividends and taxed at slab rates. From 01 April 2026, they are taxed as capital gains. The impact varies significantly by shareholder type:

For most retail investors this is likely more favourable. Companies using buyback as an alternative to dividend distribution need to recalibrate their capital return strategy.

Interest deduction against dividend and mutual fund income: removed

Previously, you could deduct interest expenses of up to 20% of income incurred to earn dividend or mutual fund income. From 1 April 2026, no deduction is permitted, regardless of actual borrowing. If you have a leveraged structure built around dividend-yielding stocks or mutual fund distributions, your taxable income goes up. Review such arrangements and assess the post-tax impact.

Sovereign Gold Bonds: capital gains exemption narrowed

The CGT exemption on SGB redemption now applies only to bonds purchased at the original issue and held to maturity. If you bought SGBs on the secondary market, redemption gains will be taxed as capital gains. This significantly affects investors who have been acquiring SGBs on exchanges expecting tax-free exits.

Gift and deemed gift provisions: retained, renumbered

No substantive change. The existing framework for taxation of gifts and deemed gifts is carried over intact. Documentation references simply need to be updated to the new clause numbers.

For AIFs and Fund Managers

PPMs, contribution agreements, investor communications: all carry stale citations

The governing section for AIF pass-through taxation, previously Section 115UB, has been renumbered under the new Act. Every fund document referencing the 1961 Act needs to be updated before your next close, LP communication, or investor report. This is an immediate documentation task, not a future one.

TDS provisions: consolidated

What were 65+ TDS sections under the 1961 Act are now 9 clauses (390-398) under the 2025 Act. Coordinate with your fund administrator and accountants to update withholding workflows and compliance checklists. Technology systems processing TDS deductions should also be reviewed for mapping accuracy under the new numbering.

For Salaried Individuals

Tax slabs and rates: unchanged

The new regime remains the default. Income up to Rs. 12 lakh is tax-free; Rs. 12.75 lakh for salaried individuals after the Rs. 75,000 standard deduction. The old regime remains available via Form 10-IEA.

Form 16 is now Form 130

Several key tax forms have been renamed. They are functionally identical, same purpose, same issuance timelines, just new numbers. Here is what has changed:

In June 2026, you will still receive the old Form 16 for FY 2025-26 as usual. The first Form 130 will be issued in June 2027 for Tax Year 2026-27.

HRA: 50% exemption extended to 8 cities

The 50% HRA exemption, previously available only in Delhi, Mumbai, Kolkata, and Chennai, now extends to four additional cities: Bengaluru, Pune, Hyderabad, and Ahmedabad. Additionally, HRA claimants must now disclose their relationship with the landlord in the new Form 124, specifically targeting rent paid to family members.

Perquisite values revised

Company-provided car perquisite values, unchanged for years, have finally been updated:

Employer-borne commuting costs, including reimbursements and not just employer-provided vehicles, are now also excluded from taxable perquisites. Review your salary structure if you have a car lease or company vehicle arrangement.

Education and hostel allowances revised upward

The education allowance has been updated to Rs. 3,000 per month per child, up from Rs. 100, a figure that had not been revised in decades. Hostel allowance limits have also been revised. These allowances are relevant under the old tax regime only.

Filing deadlines: ITR-3 and ITR-4 extended

Non-audit taxpayers filing ITR-3 or ITR-4 now have until August 31, extended from July 31. ITR-1 and ITR-2 remain due on July 31. The revised return window has been extended to 12 months from the end of the Tax Year, with a fee applicable for revisions filed after the 9-month mark.

The Bottom Line

The Income Tax Act, 2025 is a structural overhaul more than a policy one. For most taxpayers, the immediate obligation is documentation: audit your agreements, update your section references, and familiarise yourself with the new form names and clause numbers. The substantive changes that actually move the needle are the buyback taxation shift, the removal of the interest deduction on dividend income, the narrowing of the SGB exemption, and the HRA city expansion. Everything else is largely housekeeping.

Key highlights include:

• GST 2.0: A rationalized four-slab structure (0%, 5%, 18%, 40%) replacing the earlier 5-12-18-28% system with additional cess.
• Tobacco & Cigarettes: New GST rate assignments (18% or 40%) and elimination of the GST Compensation Cess from February 2026.
• Intermediary Services: Services to overseas clients reclassified as exports no GST levy and ITC now available.
• Compliance: Hard validations on the GST portal from January 2026 can block GSTR-3B filing for ITC mismatches.
• Budget 2026 Reforms: Minimum threshold for export refunds removed; clarified credit note treatment and new appellate mechanisms.

The Union Budget 2026-27 and subsequent GST Council decisions have ushered in one of the most significant overhauls of the GST framework since its inception in 2017. These GST Changes span rate rationalization, export facilitation, stricter compliance enforcement, and improved procedural fairness. Below is a detailed analysis of each change and its implications for businesses across sectors.

1. GST 2.0 – Rate Rationalization

The most consequential change of 2026 is the complete restructuring of the GST rate slabs. The earlier five-tier system  0%, 5%, 12%, 18%, and 28% (plus cess)  has been replaced with a cleaner four-slab framework effective September 22, 2025, now widely referred to as GST 2.0.

Revised Rate Structure

Key Implications

• The 12% slab has been abolished. Goods previously taxed at 12% have been redistributed to either 5% or 18% based on their category.
• The 28% slab with additional cess on luxury and sin goods is now replaced by a unified 40% slab, simplifying computation and invoicing.
• Businesses in affected sectors must update ERP systems, invoicing software, and tax computation workflows to reflect the new rates immediately.
• Companies supplying goods that have moved from 12% to 18% may see an increase in input costs or need to renegotiate contracts with customers.
• Sectors like packaged food (5%) and consumer electronics (18%) must review their product classification to avoid inadvertent misclassification and associated penalties.

2. Tobacco & Cigarette Taxation Changes (February 2026)

Tobacco products have long been subject to a complex interplay of GST, compensation cess, and Central Excise Duty. The February 2026 amendments bring significant restructuring to this sector.

Key Changes

• Cigarettes and tobacco products are now assigned specific GST rates of either 18% or 40%, depending on the product category.
• The GST Compensation Cess on tobacco products is being eliminated. This cess, originally introduced to compensate states for revenue loss, is replaced by the revised GST rates within the new structure.
• Central Excise valuation and levy mechanisms have been revamped to align with the new GST rate assignments.
• The effective tax incidence is designed to be revenue-neutral for the government while simplifying the calculation methodology for manufacturers, importers, and traders.

Implications for the Industry

• Tobacco manufacturers and importers must recalibrate pricing models and update product-level tax mappings.
• Retailers and distributors should verify that their billing systems reflect the correct new rate to avoid non-compliance.
• Businesses that have availed ITC on cess paid in the past must reconcile their credit ledgers in light of the cess discontinuation.

3. Intermediary Services – Reclassification as Exports

In a landmark and long-awaited relief for the Indian services export industry, Budget 2026-27 has fundamentally altered the place of supply rules for intermediary services.

What Has Changed

• Previously, the place of supply for intermediary services was the location of the supplier (i.e., India), making them taxable at 18% GST even when the client was overseas.
• With the amendment, the place of supply for intermediary services is now aligned with the recipient’s location. When the recipient is outside India, the supply qualifies as an export of service.
• This means no GST is levied on such services, and businesses can now claim Input Tax Credit (ITC) on inputs used for providing these services.

Who Benefits

• IT/ITES companies, consulting firms, marketing agencies, back-office service providers, and any Indian entity acting as an intermediary for overseas clients.
• This change eliminates the long-standing dispute between taxpayers and tax authorities on whether intermediary services constituted exports.
• Businesses that had paid GST on such services and did not claim refunds should now evaluate eligibility for retrospective claims or adjustments.

Action Points for Businesses

• Review all service agreements with overseas clients to determine if the intermediary classification applies.
• Update GST returns and ITC claims accordingly, and consult a tax professional to assess the impact on ongoing contracts.
• Document the nature of services carefully to substantiate the export classification in the event of scrutiny.

4. Compliance & Portal Changes (January 2026 Onwards)

The GST portal has evolved from issuing warnings to enforcing hard validations, representing a significant tightening of the compliance framework that all registered taxpayers must be aware of.

GSTR-3B Filing Restrictions

• From January 2026 returns onwards, the GST portal will block the filing of GSTR-3B in cases where ITC reported does not match the eligible balances in GSTR-2B.
• Earlier, such mismatches generated warnings but did not prevent filing. The shift to hard validations means non-reconciled returns simply cannot be submitted.
• Penalties for missed deadlines now include: late fees, interest on unpaid tax, loss of ITC, suspension of GST registration, and higher tax outgo.

ITC Reconciliation- Now Critical

• Businesses must ensure that purchase invoices are reflected in GSTR-2B before claiming ITC in GSTR-3B. Auto-population errors or supplier non-filing will directly block your returns.
• Monthly reconciliation between GSTR-2A (dynamic) and GSTR-2B (static, cut-off based) is now a business-critical process, not merely a good practice.
• Where discrepancies arise, taxpayers should proactively follow up with suppliers to ensure timely invoice reporting on the portal.

Practical Steps for Compliance

• Set up automated alerts for GSTR-2B mismatches at least one week before filing deadlines.
• Implement a formal vendor compliance policy ensure key suppliers file returns on time, failing which, ITC may be disallowed.
• Engage a GST compliance tool or ERP module that auto-reconciles GSTR-2B with purchase registers on a real-time basis.

5. Budget 2026 – Procedural Reforms

Beyond rate and compliance changes, Budget 2026-27 introduces several procedural clarifications and reforms that improve the overall taxpayer experience.

Export Refunds – Threshold Removed

• The minimum monetary threshold for sanctioning GST refund claims on exports made with payment of tax has been removed.
• Previously, very small refund claims were often held up or rejected due to minimum processing thresholds. Businesses can now claim refunds regardless of the amount, improving cash flows for small exporters.

Credit Note Treatment – Clarified

• The rules governing credit note issuance and ITC reversal have been clarified to resolve longstanding disputes.
• Post-sale discount valuation rules have been eased, providing clearer guidance on when a credit note triggers ITC reversal for the recipient versus when it does not.
• Recipients of credit notes must continue to accept or reject them through the Integrated Management System (IMS) to maintain accurate ITC records.

Interim Appellate Mechanisms

• New interim appellate procedures have been introduced to provide taxpayers with a faster route to challenge tax demands, particularly during the pendency of appeals.
• This is expected to reduce the burden on GST tribunals and provide businesses with greater certainty and cash flow relief while disputes are being resolved.
• Taxpayers should review pending demand notices to determine whether the new appellate options provide a more favorable route for resolution.

Conclusion

The GST changes of 2026 represent the government’s continued commitment to simplifying India’s indirect tax architecture while simultaneously strengthening compliance infrastructure. From the sweeping rate rationalization under GST 2.0 to the portal-level hard validations and the significant relief for service exporters, these amendments impact virtually every registered taxpayer.

It is imperative for businesses to proactively review their tax classifications, update billing and ERP systems, reconcile ITC records, and engage qualified GST professionals to navigate the evolving landscape. Organizations that adapt early will benefit from the simplified framework; those that delay risk penalties, blocked filings, and disrupted cash flows.

Employee Stock Option Plans (ESOPs) have become an essential tool for businesses, especially startups and growth-stage companies, to attract, retain, and motivate talent. Understanding the taxation of ESOPs in India is crucial for both employees and employers to ensure compliance with tax laws and make informed financial decisions.

What is ESOP?

Employee Stock Option Plans (ESOPs) are programs that allow employees to purchase company stock at a predetermined price, typically lower than the market value, after a certain period or upon achieving specific milestones. ESOPs serve as a form of compensation, providing employees with the opportunity to benefit from the company’s growth and success.

Key Features of ESOPs:

• Eligibility: Usually granted to key employees, directors, and senior management.
• Vesting Period: A specified period during which employees must be associated with the company before they can exercise their options.
• Exercise Price: The price at which employees can buy the shares, which is often lower than the market price.
• Market Price: The current market value of the shares when employees choose to sell.
  

Importance of ESOPs in Compensation Structures, Especially for Startups and Growth-Stage Companies

ESOPs play a vital role in startup and growth-stage companies’ compensation strategies. Since startups typically cannot afford to pay competitive salaries, they use ESOPs as an alternative form of compensation to attract top talent. These plans align the interests of employees with those of the company, fostering long-term commitment and performance.

Benefits of ESOPs for Startups and Growth-Stage Companies:

• Attracts Talent: ESOPs make compensation packages more attractive, helping startups compete with larger companies.
• Employee Motivation: Employees are more likely to be motivated and work towards the company’s success, knowing they have a stake in its future.
• Retention: The vesting period ensures that employees stay with the company for a specified time, which reduces turnover and enhances long-term stability.
  

Why Understanding ESOP Taxation in India is Important?

Relevance of Taxation for Employees and Employers

The taxation of ESOPs can significantly impact both employees and employers in India. Employees may not realize the full tax liability associated with their stock options, especially at the time of exercise or sale. Understanding ESOP taxation ensures that they are not caught off guard by high tax bills.

For employers, properly structuring and communicating the tax implications of ESOPs helps in managing the company’s payroll, compliance, and accounting processes. Employers also need to ensure that TDS (Tax Deducted at Source) is accurately calculated and deposited.

Key Tax Considerations:

• Employee’s Responsibility: Employees must understand how ESOPs will be taxed at the time of exercise and sale.
• Employer’s Responsibility: Employers must withhold TDS at the time of exercise and ensure compliance with the tax laws to avoid penalties.
  

Implications of ESOP Taxation on Financial Planning

ESOP taxation in India has significant implications on an individual’s and company’s financial planning. For employees, understanding the tax implications can help them optimize the timing of when they exercise their options or sell their shares to minimize their tax burden.

Key Points for Employees:

• Tax at Exercise: Employees must account for perquisite taxation, which is treated as salary income and taxed according to the applicable income tax slabs.
• Tax at Sale: The sale of ESOP shares in future is subject to capital gains tax, either as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), depending on the holding period.
• Tax Planning: Employees should consider the timing of both exercising and selling their options to optimize tax outcomes, potentially deferring tax liability until a more favorable time.
  

Key Points for Employers:

• Compliance with Tax Regulations: Employers should ensure the correct TDS is withheld on ESOP benefits and that the proper documentation is maintained.
• Tax Liabilities and Reporting: ESOPs need to be reported under the company’s books as part of compensation, which can affect profit-sharing and other financial strategies.

ESOP Taxability in India: A Detailed Overview

Employee Stock Option Plans (ESOPs) provide employees with an opportunity to purchase company shares at a preferential price. However, ESOPs are subject to taxation at various stages under the Indian Income Tax Act. It is essential for both employees and employers to understand how ESOPs are taxed in India to effectively plan for tax liabilities and ensure compliance.

ESOP Taxation under the Income Tax Act

Under the Indian Income Tax Act, ESOPs are taxed as perquisites when they are granted or exercised, and the tax treatment may vary depending on the stage of the ESOP lifecycle. The taxation of ESOPs falls under Section 17(2) of the Income Tax Act, which deals with perquisites provided to employees.

Taxability of ESOP under Income Tax Act:

• Grant Stage: There is no tax at the time of granting the options. Employees only pay tax when they exercise the options or sell the shares.
• Exercise Stage: ESOPs are taxed as perquisites at the time of exercise, based on the difference between the exercise price and the market value (Fair Market Value / FMV) of the shares on the date of exercise.
• Sale Stage: When ESOP shares are sold, the difference between the sale price and the FMV at the time of exercise is subject to capital gains tax.
  

The perquisite value of ESOPs (which is treated as income) is calculated based on the FMV of shares as on date of exercise, and employees are required to pay income tax on this value.

Tax on ESOPs in India: Key Considerations

Understanding the taxability of ESOPs in India requires a clear distinction between the tax events that occur at different stages: the grant, exercise, and sale of ESOPs. Below is a detailed breakdown of these stages:

Taxation at the Time of Grant

• When is tax applied?
  There is no immediate tax liability at the time of granting ESOPs in India. Employees are not required to pay tax when the options are granted, as there is no transfer of shares or money involved at this stage.
• Valuation Impact
  The valuation of the shares only comes into play at the exercise stage. However, the difference between exercise price and Fair Market Value (FMV) on date of exercise of the shares will determine the amount taxable as perquisite.
  

Taxation at the Time of Exercise

At the time of exercising the ESOPs, employees are taxed on the perquisite value, which is the difference between the FMV and the exercise price.

• How is perquisite taxation calculated?
  The perquisite value is calculated as:
  Perquisite Value=FMV of Shares at Exercise−Exercise Price
  
  This amount is added to the employee’s income and taxed at the applicable income tax rates.
  
• Impact on Employees:
  
  • The perquisite taxation at the time of exercise can significantly increase the employee’s taxable income, as the perquisite value is taxed as a part of salary.
  • Employees must pay tax on the perquisite value, even though they have not yet sold the shares.
    

Taxation at the Time of Sale

When employees sell their ESOP shares, they are subject to capital gains tax on the difference between the sale price and the FMV at the time of exercise.

• Short-Term vs. Long-Term Capital Gains:
  
  • Short-Term Capital Gains (STCG): If the shares are sold within three years from the date of exercise, the gains are considered short-term, and taxed at 15%.
  • Long-Term Capital Gains (LTCG): If the shares are held for more than three years, the gains are considered long-term and taxed at 10% if the total gain exceeds ₹1 lakh in a financial year.
    
• How is the capital gain calculated?
  
  Capital Gain=Sale Price−FMV at Exercise
  If the sale price is higher than the FMV at exercise, the employee must pay tax on the capital gains. If the shares are sold at a loss, there may be an opportunity for tax relief under set-off provisions.
  

Key Points to Remember:

• ESOP taxation is not triggered at the time of grant, but it is triggered at the time of exercise and sale.
• The exercise price and the FMV at exercise play a critical role in determining the tax liability.
• Perquisite tax is applicable when options are exercised, based on the difference between FMV and exercise price.
• Capital gains tax applies when the shares are sold, with different rates for short-term and long-term gains.
• Employees must carefully plan the timing of exercise and sale to optimize their tax liabilities.
  

Quick Reference Table: Taxation Breakdown

Example of ESOP Taxation in India

Here’s a example of how ESOP tax perquisites and capital gains tax are calculated for employees holding ESOPs of unlisted company in India.

Example:

• Grant Date: 1st April 2020
• Exercise Date: 1st April 2023
• Number of Options Exercised: 700
• Fair Market Value (FMV) on 1st April 2023: ₹150
• Amount Collected from Employee (Exercise Price): ₹50
  

1. Taxation at the Time of Exercise (Perquisite Tax)

At the time of exercising the options, the employee is taxed on the perquisite value, which is the difference between the FMV and the exercise price.

Perquisite Value Calculation:

• FMV at Exercise: ₹150
• Exercise Price: ₹50
• Perquisite Value: ₹150 – ₹50 = ₹100 per share
  

Taxable Perquisite Amount:

• 700 shares × ₹100 = ₹70,000
  The employee will be taxed on ₹70,000 as perquisites under the salary income head.
  

2. Taxation at the Time of Sale (Capital Gains Tax)

When the employee sells or transfers the shares, they will be taxed on the capital gains (the difference between the sale price and the FMV at exercise).

Example:

• Sale Price in October 2024: ₹200
• FMV at Exercise: ₹150
• Capital Gain per Share: ₹200 – ₹150 = ₹50
• Total Capital Gain: 700 shares × ₹50 = ₹35,000
  

Since the shares are sold within 24 months of exercise, the capital gain is considered Short-Term Capital Gain (STCG) and will be taxed at applicable rates.

3. Tax Implications in the Hands of the Employer

The perquisite value (₹70,000) is considered a salary cost for the employer and is an allowable expenditure. However, the employer is required to deduct TDS on the perquisite amount, as per the provisions for TDS on salary.

If the perquisite amount is large compared to the employee’s salary (e.g., ₹13 lakhs perquisite vs ₹9 lakhs salary), the employer must ensure the correct documentation and compliance for TDS deduction.

4. Deferral Option for Tax Liability (Available to Eligible Startups)

For eligible startups holding an Inter-Ministerial Board (IMB) Certificate, there is an option to defer the perquisite tax liability until the sale, termination of employment, or five years from the date of allotment of the ESOP shares.

The deferral option applies only if the employee is working in an eligible startup.

Deferral Example for 2026:

How is TDS on ESOP Calculated?

Understanding how TDS on ESOPs is calculated is crucial for employees and employers to ensure compliance with tax regulations. Tax Deducted at Source (TDS) is the amount deducted by the employer from the employee’s income and paid to the government. For ESOPs, TDS applies when employees exercise their stock options, and the employer is responsible for withholding this tax.

TDS on ESOPs: Understanding the Withholding Tax

When an employee exercises their ESOP options, they are taxed on the perquisite value (difference between the market price and exercise price). TDS is applicable to this perquisite value, and the employer is required to withhold tax at the time of exercise.

Who is responsible for paying TDS on ESOP?

• Employer’s Responsibility: The employer is responsible for calculating, withholding, and remitting TDS to the government.
• Employee’s Responsibility: Employees are not required to directly pay TDS on ESOPs but should report the deducted tax when filing their income tax returns.
  

Calculation of TDS: Step-by-Step Guide with Examples

The TDS on ESOPs is calculated as follows:

1. Determine Perquisite Value:
   Formula:
   Perquisite Value = FMV at Exercise – Exercise Price
   
   Example:
   
   • FMV at exercise = ₹500
   • Exercise Price = ₹300
     Perquisite Value = ₹500 – ₹300 = ₹200 per share
     
2. TDS Rate: The TDS rate is typically set at effective tax rate depending on overall income estimate furnished by an employee to employer.
3. TDS Deduction:
   Formula:
   TDS = Perquisite Value × TDS Rate
   
   Using the above example, if an employee exercises 100 shares:
   TDS = ₹200 × 100 × 30% (assumed highest slab rate) = ₹6,000
   
4. Payment: The employer then remits the calculated TDS to the government on behalf of the employee.
   

TDS on ESOP for Listed Companies vs Unlisted Companies

There are key differences in how TDS is handled for ESOPs in listed companies vs unlisted companies:

ESOP Tax Perquisite Valuation

Understanding perquisite tax on ESOPs is crucial for employees and employers alike to comply with tax regulations and optimize financial planning. This section delves into the key aspects of ESOP tax perquisite valuation, including the process of determining the fair market value (FMV) of ESOPs and how it affects tax liabilities.

What is Perquisite Tax on ESOP in India?

Perquisite tax on ESOPs refers to the tax levied on the benefit an employee receives from exercising their stock options. The tax is calculated based on the difference between the exercise price and the Fair Market Value (FMV) of the company’s shares at the time of exercise.

Key Points:

• Taxable Perquisite: The perquisite value of ESOPs is treated as part of the employee’s income.
• Taxable Amount: Employees are taxed on the difference between the FMV of shares at the time of exercise and the exercise price.
  

ESOP Tax Perquisite Valuation and Its Importance

The ESOP tax perquisite valuation determines the amount on which employees will be taxed. The higher the FMV of the shares, the higher the tax burden on the employee at the time of exercise. This makes accurate valuation essential for both tax compliance and financial planning.

• Importance of FMV: The FMV is the basis for calculating the perquisite value, which directly impacts the tax liability.
• Impact on Employees: Accurate valuation ensures employees are not overtaxed and can plan their finances better.
  

How the Fair Market Value (FMV) of ESOPs is Determined

The FMV of ESOPs is crucial for determining the perquisite tax at the time of exercise. Here’s how it is determined:

• For Listed Companies: The FMV is the market price of the company’s shares on the stock exchange on the day of exercise.
• For Unlisted Companies: The FMV is determined through an independent valuation to be done by a merchant banker based on various factors such as the company’s financial performance, market conditions, and comparable company data.
  

Perquisite Tax on ESOP for Listed and Unlisted Companies

ESOP Tax Perquisites for Listed Companies

For listed companies, the FMV is easily determined because it is based on the market price of the shares, which fluctuates according to the stock exchange.

• How Valuation is Determined: The valuation is straightforward, as it is the closing price of the stock on the stock exchange at the time of exercise.
• Tax Calculation: The FMV at exercise minus the exercise price determines the taxable perquisite value, which is taxed as part of the employee’s income.
  

ESOP Tax Perquisites for Unlisted Companies

Valuation for unlisted companies is more complex because there is no publicly available market price.

• Challenges in Valuation: The FMV of shares in unlisted companies is determined through a valuation report by a qualified valuer, considering various factors like financials, growth potential, and industry benchmarks.
• Key Differences:
  
  • The FMV in unlisted companies may be subjective and vary from one valuation report to another.
  • Employees may face higher uncertainty regarding the actual value of their options, which affects their tax planning.
    

ESOP vs RSU vs Phantom Stock – What Should Founders Choose?

When structuring equity compensation, founders must choose between ESOPs, Restricted Stock Units (RSUs), and Phantom Stock. Each has distinct tax, dilution, and governance implications.

Tax Treatment

ESOPs are taxed at exercise (as perquisite income on the FMV-exercise price difference) and again at sale (as capital gains). Eligible startup employees can defer perquisite tax until sale, termination, or five years from allotment a major advantage. Short-Term Capital Gains (within 3 years) are taxed at 15%; Long-Term Capital Gains (after 3 years) at 10%.

RSUs are taxed only at vesting as salary income (on the full FMV). No subsequent capital gains tax applies appreciation accrues tax-free. This creates a simpler tax profile but a larger upfront tax bill.

Phantom Stock creates zero income tax at grant or exercise. Instead, the company pays a tax gross-up at settlement, treating it as bonus compensation subject to TDS. This shifts the tax burden to the company but eliminates employee tax complexity.

Dilution Impact

ESOPs create real dilution: exercised options expand your fully diluted share count and appear on your cap table. Phantom Stock creates zero dilution it’s a contractual liability, not equity. RSUs create dilution if settled in shares, but can be settled in cash to avoid dilution.

For early-stage companies, ESOPs are appropriate. For well-funded or pre-IPO companies, phantom stock minimizes dilution while maintaining employee incentives.

Accounting Impact

ESOPs result in lower accounting expense relative to economic value (favorable for P&L). RSUs and Phantom Stock require mark-to-market accounting each period, creating volatility and growing liabilities on your balance sheet as valuation increases. Phantom Stock must be classified as a liability rather than equity, further distorting leverage ratios.

Investor Perception

ESOPs are the gold standard for early-stage companies. Investors expect them, view them as tax-efficient and aligned, and scrutinize documentation closely. RSUs raise questions at early stage (why not use the simpler ESOP?). Phantom Stock signals founder reluctance to dilute, raising red flags unless clearly justified and documented.

For fundraising success, use ESOPs with tight documentation and transparent communication.

What Investors Check During ESOP Due Diligence

ESOP due diligence is critical during funding rounds and M&A. Investors assess governance quality, identify hidden liabilities, and verify cap table accuracy.

Pool Size and Authorized Allocation

Seed companies should maintain a 5-8% fully diluted ESOP pool; Series A, 10-15%; Series B+, 15-20%. Investors flag undersized pools (future dilution risk) or oversized pools (mismanagement signal). Verify that your Articles of Association authorize the pool and that allocated shares don’t exceed authorized shares over-allocation is a compliance violation requiring shareholder approval.

Vesting Schedule and Documentation

Industry standard is 4-year vest with 1-year cliff. Investors pull all grant letters, board resolutions (Form MGT-14), and vesting schedules. They verify consistency, proper documentation, and acceleration clauses. Missing or informal vesting documentation (spreadsheets only) raises red flags and delays funding.

Documentation Gaps and ROC Compliance

Common red flags:

• Missing or delayed Form PAS-3 filings (every ESOP grant must file within 30 days; ₹100/day penalty for delays)
• Missing Form MGT-14 board resolutions
• No formal ESOP plan document
• Cap table inconsistencies with Form MGT-7 (Annual Return)
• Directors with deactivated DINs (DIR-3 KYC non-compliance)

Investors use documentation gaps as valuation negotiation points. Fix compliance issues before due diligence begins.

Tax Exposure and Perquisite Valuation

Investors verify your FMV valuations are defensible. For unlisted companies, an understated FMV invites IT department challenges and back-tax liability. Ensure your most recent valuation comes from a credible merchant banker and reflects current company value.

Check for exercise prices significantly below FMV (large perquisite tax liability). Document ESOP tax deferral elections if applicable. Disclose any past IT audits or queries related to ESOP valuations unresolved issues delay funding.

Setting Up ESOP After Series A

Series A demands institutional-grade ESOP governance. Formalize processes, align with investor requirements, and ensure ROC compliance.

ESOP Governance Framework

Adopt a formal ESOP Plan Document defining: eligibility, grant authority, vesting schedule (standard 4-year with 1-year cliff), exercise price methodology, acceleration provisions, deferral elections, and settlement terms. Document all Board approvals in Form MGT-14 filings with ROC. This creates an audit trail investors can verify.

Cap Table Reconciliation

Migrate from spreadsheets to cap table software (Carta, Pulley, Eqvista). Audit all pre-Series A grants and file any missing PAS-3 forms retroactively. Reconcile your cap table with Form MGT-7 annual filings. Establish quarterly cap table reviews and implement automated vesting tracking. Maintain a fully diluted share count that always includes unvested and unexercised options.

Valuation and FMV Documentation

Conduct annual independent merchant banker valuations (409A equivalent) within 90 days of fiscal year-end. Set ESOP exercise prices at or near FMV to minimize perquisite tax. Maintain all valuation reports and be prepared to produce them during audits or investor due diligence. Valuations are typically valid for 12 months.

Tax Compliance and Employee Communication

Calculate TDS liability on all ESOP exercises and remit on time. If your company qualifies for ESOP tax deferral (eligible startup with Inter-Ministerial Board certificate), include deferral language in grant letters and maintain election records. Provide clear grant letters to all employees explaining options, vesting, and tax implications. Host annual ESOP education sessions and publish FAQs to reduce confusion and disputes.

Investor Alignment and Terms

Align your ESOP structure with Series A investor terms, which typically mandate: minimum pool size (e.g., 15% fully diluted reserved), weighted-average anti-dilution adjustments in future rounds, full acceleration on change of control, and 1-year vesting cliffs. Document these in your ESOP plan and employee grant letters.

Documentation Audit

Post-Series A, ensure you have: signed ESOP Plan Document, Board resolutions (Form MGT-14) for all grants filed with ROC, signed grant letters for all employees, PAS-3 filings for all exercises, current cap table, annual FMV valuation, TDS records, deferral elections (if applicable), and annual cap table reconciliation with Form MGT-7. Fix any gaps immediately.

Taxation of Foreign ESOPs in India

Understanding the taxation of foreign ESOPs in India is crucial for Indian residents working with international companies. Foreign ESOPs are subject to Indian tax laws, and Indian employees must ensure they comply with all reporting and tax payment obligations. Here’s a comprehensive breakdown of the key factors to consider for employees holding foreign ESOPs.

Taxation of Foreign ESOPs in India for Indian Residents

Taxability of Foreign ESOPs:
Indian residents holding foreign ESOPs are taxed on the perquisite value (difference between the exercise price and the FMV) in India. The taxability applies when the employee exercises their options or sells the shares.

• Perquisite Tax: At the time of exercise, employees are taxed on the perquisite value, which is calculated based on the FMV of the foreign company’s shares and the exercise price.
• Capital Gains Tax: When employees sell the foreign ESOP shares, they are subject to capital gains tax based on the difference between the sale price and the FMV at the time of exercise.
  

Reporting and Taxation Responsibilities for Indian Residents Holding Foreign ESOPs

• Reporting in India: Indian residents must report their foreign ESOP income under their Income Tax Return (ITR), declaring the perquisite value at the time of exercise and the capital gains when the shares are sold.
• Foreign Tax Credit: Employees may also claim a foreign tax credit for any taxes paid abroad on the foreign ESOP income, depending on the tax treaties between India and the country where the foreign company is based.
  

Cross-Border Taxation: Key Factors to Consider

The taxation of foreign ESOPs involves several key international and domestic tax considerations. Here’s a breakdown of the main factors:

1. Tax Treaties:
   India has Double Tax Avoidance Agreements (DTAAs) with several countries. These agreements help prevent double taxation on income derived from foreign ESOPs. Employees can claim foreign tax credits for taxes paid in the foreign country.
2. Source of Income:
   The country in which the foreign company is based may impose taxes on the ESOPs. Employees need to assess whether the foreign country withholds tax on the exercise or sale of ESOP shares and understand how this impacts their Indian tax filings.
3. Capital Gains Tax:
   The Indian tax authorities tax capital gains from foreign ESOPs. However, depending on the country of origin, the rate and rules for capital gains taxation may vary.
   

What Steps Employees Need to Take When Receiving ESOPs from a Foreign Entity

1. Consult a Tax Advisor: Employees should consult a tax professional familiar with cross-border taxation to understand their tax liabilities in India and the foreign country.
2. Track Foreign Tax Payments: Employees should keep a record of any taxes paid in the foreign country on their ESOP income to claim foreign tax credits.
3. Report Foreign ESOPs in ITR: Ensure that all foreign ESOP-related income is reported accurately in the Indian Income Tax Return to avoid penalties for non-disclosure.
   

Taxability of ESOP in the Hands of Employees

The taxability of ESOPs in the hands of employees involves taxation at different stages of the ESOP lifecycle: grant, exercise, and sale. Below is a breakdown of how employees are taxed at each stage.

How ESOP Tax is Treated for Employees

1. At the Time of Grant:
   There is no tax at the time of granting ESOPs to employees. The tax liability only arises when the employee exercises the option or sells the shares.
2. At the Time of Exercise:
   • Perquisite Tax: The perquisite value is taxed as part of the employee’s salary at the time of exercise. The perquisite value is calculated as:
     Perquisite Value = FMV at Exercise – Exercise Price
     The perquisite value is added to the employee’s total income and taxed at the applicable income tax rate.
     
3. At the Time of Sale:
   • Capital Gains Tax: When the employee sells the shares, the difference between the sale price and the FMV at the time of exercise is subject to capital gains tax.
     
     • Short-Term Capital Gains (STCG): If the shares are sold within 3 years of exercise, STCG is applied at 15%.
     • Long-Term Capital Gains (LTCG): If sold after 3 years, LTCG is taxed at 10% (subject to exemptions).
       

The Role of the Employee in Reporting and Paying Taxes on ESOP Income

• Accurate Reporting: Employees must report ESOP-related income under their income tax returns, which includes:
  • Perquisite value at the time of exercise.
  • Capital gains from the sale of shares.
    
• Claiming Foreign Tax Credit: Employees who paid tax on foreign ESOPs should claim foreign tax credit when filing their returns, ensuring they are not taxed twice on the same income.
  

ESOP Taxation in Startups vs Large Corporations

Here’s a comparison of ESOP taxation in startups and large corporations, highlighting the key tax considerations for employees in both scenarios.

India is entering a decisive phase of direct tax reform with the Income-tax Act, 2025 scheduled to come into force from 1 April 2026. To operationalize the new Act, the Central Board of Direct Taxes has issued the Draft Income-tax Rules, 2026 along with revised income-tax forms for public consultation. The consultation window remains open for 15 days and closes on 22 February 2026.

The Draft Income-tax Rules, 2026 are not merely procedural supplements. They form the operational framework that determines how the new law will be applied in practice. From return filing and verification to certifications, disclosures, and administrative processes, the draft rules define the compliance experience under the new tax regime.

Purpose of releasing the draft rules

The draft rules have been released with clearly defined objectives:

• to translate the Income-tax Act, 2025 into executable procedures
• to provide early operational clarity to taxpayers and professionals
• to enable stakeholder participation before final notification
• to reduce transition-related friction by identifying implementation gaps early

This approach reflects a deliberate move toward consultative and transparent tax governance.

How the Draft Income-tax Rules, 2026 Impact Significantly

The Draft Income-tax Rules, 2026 play a decisive role because they determine how statutory provisions are interpreted and applied. While the Act lays down principles, the rules govern execution, compliance mechanics, and administrative discipline.

Alignment with the New Income-tax Act, 2025

The draft rules are closely aligned with the reform objectives of the new Act, particularly simplification and predictability. The drafting approach reflects:

• simplified and clearer statutory language
• structured presentation through tables and standardized formats
• reduced reliance on explanatory narrative text
• elimination of interpretational overlap across provisions

This alignment ensures consistency between legislative intent and administrative execution.

Structural upgrades overview

Collectively, these upgrades support a cleaner, technology-ready compliance framework.

Participatory Governance and Public Consultation

The Draft Income-tax Rules, 2026 are issued as part of a participatory rulemaking process. CBDT has explicitly invited feedback from taxpayers, professionals, industry bodies, and other stakeholders to improve clarity and implementation feasibility.

Key features of the consultation process

The consultation framework has been designed to be structured and outcome-driven:

• digital submission through the e-filing portal
• OTP-based verification to ensure authenticity
• rule-wise and form-wise feedback capture
• classification of suggestions into intent-based categories

This structure enables focused review and minimizes generic or non-actionable inputs.

Major Structural Changes: Rules and Forms Overhaul

The Draft Income-tax Rules, 2026 introduce one of the most extensive restructurings of India’s tax compliance architecture since the Income-tax Rules, 1962.

Reduction in Total Rules and Forms

The reduction is significant and reflects a conscious policy shift toward rationalization rather than incremental amendment.

What Enabled This Rationalisation

The reduction in volume has been achieved through multiple design interventions:

• consolidation of multiple rules governing similar subject matter
• removal of provisions no longer relevant in a digital environment
• simplification of drafting to reduce cross-referencing
• replacement of narrative explanations with structured tables and formulas

Policy Intent Behind the Overhaul

The underlying policy objectives include:

• lowering compliance burden without diluting controls
• reducing ambiguity that often leads to litigation
• aligning procedural rules with centralized and faceless tax systems
• improving administrative efficiency and predictability

Smarter, Technology-Enabled Income-tax Forms

Introduction of Smart Forms

A key feature of the Draft Income-tax Rules, 2026 is the introduction of smart income-tax forms. These forms are designed as system-driven compliance tools rather than static reporting documents.

Key upgrades in form design

The proposed forms incorporate several technology-enabled features:

• automated reconciliation across interconnected fields
• prefilled data using system-available information
• standardized common sections to avoid repeated disclosures
• simplified instructions and notes for user clarity
• compatibility with centralized processing and verification systems

Expected Benefits

For individual taxpayers

• cleaner prefilled returns
• reduced manual data entry
• fewer mismatches and validation errors
• faster processing and reduced follow-up queries

For businesses and professionals

• lower documentation and reconciliation effort
• improved consistency in disclosures
• faster assessments due to standardized data
• reduced compliance risk from inadvertent errors

Key Policy Shifts and Notable Rationalisations

Simplification of Rules and Language

The draft rules adopt a uniform drafting style with clearer definitions and consistent terminology. Structured layouts replace dense legal text, making provisions easier to interpret and apply.

Clean-up of Outdated or Irrelevant Provisions

Several legacy thresholds and procedures that no longer reflect current economic or administrative realities have been rationalized. This ensures that compliance requirements remain proportionate and relevant.

Revised Definition of Accountant

The revised definition strengthens professional accountability and aims to improve the quality of certifications under the tax framework.

Stakeholder Consultation Process: How Inputs Can Be Submitted

Online Portal Details

Stakeholders can submit feedback through the e-filing portal using OTP-based verification. Each submission must clearly identify:

• the relevant rule or sub-rule
• the applicable form number, where relevant
• the specific issue or suggestion

This precision improves the usability of feedback during rule finalization.

Four Categories of Feedback

Feedback is requested under four structured categories:

• simplified and clearer statutory language
• minimization of litigation and interpretational disputes
• reduction of compliance burden
• identification of redundant or outdated rules and forms

Mapping Navigators Released

CBDT has issued mapping navigators that link the existing rules and forms with their proposed counterparts. These tools help stakeholders understand restructuring and assess practical impact more efficiently.

Implications for Taxpayers and Corporates

For individual taxpayers, the draft rules promise:

• simplified procedural requirements
• smart prefilled returns
• clearer thresholds and definitions
• reduced physical interaction with tax authorities

For corporates and professionals, the implications include:

• standardized documentation formats
• lower interpretational ambiguity
• reduced litigation exposure
• improved compliance predictability and planning certainty

Comparative Snapshot: 1962 Rules vs 2026 Draft Rules

Expected Impact on Compliance, Litigation and Tax Governance

Improved Ease of Doing Business

Standardized procedures and automation are expected to reduce turnaround time, compliance costs, and administrative friction.

Reduction in Litigation

Clearer drafting, defined thresholds, and removal of obsolete provisions reduce ambiguity, which is a primary driver of tax disputes.

Better Taxpayer Services

Smart forms and centralized processing improve accuracy, consistency, and user experience, strengthening trust in the tax system.

Transition Timeline and What Happens Next

Next Steps

CBDT is expected to review stakeholder feedback and notify the final Income-tax Rules, 2026 along with corresponding forms. Taxpayers and professionals should prepare for revised workflows, system updates, and transitional guidance.

Expert Commentary and Industry Reactions

Early expert commentary generally views the Draft Income-tax Rules, 2026 as a long-overdue structural reform. Tax professionals have highlighted the reduction in rules and forms as a meaningful step toward lowering procedural complexity and compliance fatigue.

Industry observers have particularly noted the following themes:

• appreciation for simplified drafting and structured formats
• positive response to smart forms and automated reconciliation
• expectation of reduced litigation due to clearer definitions
• support for the consultative approach adopted by CBDT

From a governance perspective, experts consider the structured feedback mechanism and mapping navigators as tools that improve transparency and implementation readiness. While stakeholders expect refinements during finalization, there is broad agreement that the draft rules establish a strong foundation for a modern, predictable, and technology-enabled tax administration.

Conclusion: A Foundational Shift in India’s Tax Compliance Framework

The Draft Income-tax Rules, 2026 represent a foundational shift in India’s tax compliance framework. By rationalizing rules and forms, simplifying language, and embedding technology into compliance processes, the framework aims to improve governance, reduce disputes, and enhance taxpayer experience. Stakeholder engagement during the consultation phase will be critical in refining the rules before the new income-tax regime becomes effective from 1 April 2026.

This note is not meant to be a legal dissection of the ruling. Instead, it is our attempt to explain, in simple terms, what has changed and what founders should be mindful of going forward.

1. The structure in brief – how Tiger Global invested in Flipkart

Tiger Global’s investment into Flipkart was not made directly into India. Like many global funds, the investment was routed through a multi-layer offshore structure.

In simple terms, capital was pooled through entities in Cayman and Mauritius. The Mauritius entities (Tiger Global International II, III and IV Holdings) invested into Flipkart’s Singapore holding company, which in turn held Flipkart India. The exit in 2018 happened through the sale of shares of the Singapore entity as part of Walmart’s acquisition of Flipkart.

The Mauritius entities claimed that the capital gains from this sale were not taxable in India under the India–Mauritius tax treaty, relying heavily on the fact that they held valid Tax Residency Certificates (TRCs) and that the investments were made prior to April 2017, which technically speaking, are grandfathered from General Anti Avoidance Rules (GAAR) provisions.

The tax department challenged this at the threshold itself, arguing that the structure was designed for tax avoidance and that the Mauritius entities were not entitled to invoke the treaty at all. 

2. What the Supreme Court has now held

The Supreme Court has reversed the Delhi High Court’s decision and has effectively agreed with the tax department’s approach.

At the heart of the ruling are three important messages.

1. First, a TRC is not a shield.
   The Court has made it clear that a Tax Residency Certificate is relevant, but it is not conclusive. It is only an entry condition. Tax authorities are entitled to go behind the TRC and examine where real control lies, how decisions are taken, and whether the entity has genuine commercial substance. The days of assuming that “TRC = treaty protection” are clearly behind us. 
2. Second, substance and control will drive outcomes.
   The Court accepted the AAR’s prima facie findings that effective control and key commercial decision-making were not really in Mauritius. On that basis, it held that the Mauritius entities could be treated as conduit entities and denied treaty entitlement itself, even before going into detailed computation or merits. 

In other words, the question is no longer only “where is the entity incorporated?”, but “where is its head and brain actually functioning from?”

3. Third, GAAR is very much in play.

A significant part of the judgment deals with GAAR. The Court has affirmed that even if investments were originally made before 1 April 2017, arrangements that continue to yield tax benefits after that date can still be examined under GAAR. Grandfathering is not a blanket immunity. Entire structures and their ongoing tax outcomes can be tested holistically.

3. Why this ruling matters beyond Tiger Global

Although this case arises from a large global fund structure, the principles laid down are directly relevant for startup groups and founders as well.

In our reading, the judgment sends a fairly unambiguous signal: India’s courts are now far more comfortable allowing the tax department to examine offshore structures not just on paper, but on how they actually function in practice.

Treaty benefits can be denied at the starting line itself if a structure appears to be set up mainly to obtain a tax outcome without corresponding commercial and governance substance. This applies not only to new structures, but potentially also to older ones that are approaching exits, secondaries or internal reorganisations.

4. Practical takeaways for founders and management teams

From a founder and group perspective, a few clear themes emerge.

1. Structures must be built around real substance, not just location.
   Where are key business and investment decisions taken? Who actually controls bank accounts, exits, large transactions and strategic calls? How independent is the offshore board in practice? These questions now matter far more than before.
2. Governance design is as important as tax design: Board composition, approval thresholds, veto rights, and the role of offshore directors are not cosmetic anymore. They will be examined to see whether the offshore entity truly functions as a decision-making centre or merely signs what is decided elsewhere.
3. Documentation will make or break outcomes.
   In a GAAR-driven world, contemporaneous records, board minutes, investment rationales, control frameworks, and functional documentation  will often determine whether a structure is respected or recharacterised.
4. Pre-2017 structures should not assume they are “safe”.
   Any group with legacy offshore structures and future liquidity events should seriously consider a pre-exit review through a GAAR and treaty entitlement lens.

Closing thoughts

The Tiger Global ruling is not just about Mauritius or one fund. It reflects a broader shift: Indian tax jurisprudence is moving decisively from form-based comfort to substance-based scrutiny.

For founders, this is less about fearing offshore structures and more about building them correctly with commercial logic, credible governance, and defensible substance from day one.

At Treelife, we are already seeing increased interest from founders and investors in reviewing existing holding structures, fund-raise setups and exit pathways in light of this judgment. We will be sharing more detailed guidance as the implications of the ruling continue to evolve.

This research note provides a comprehensive analysis of the taxation and regulatory framework governing investments in derivatives (futures and options) and listed equity shares in India as of August 2025. The analysis covers both resident Indian investors and non-resident investors, highlighting the distinct treatment under tax laws, securities regulations, and foreign exchange management rules. Recent legislative changes, including modifications to Securities Transaction Tax (STT) rates and capital gains tax provisions introduced in Budget 2024, have significantly altered the investment landscape. This note serves as a reference guide for understanding the comparative framework applicable to different categories of investors in the Indian securities market.

Taxation Framework for Derivatives (Futures and Options)

Classification of Income from Derivatives

1. For Resident Indian Investors

Income derived from trading in derivatives (futures and options) on recognized stock exchanges in India is classified as non-speculative business income under Section 43(5) of the Income Tax Act, 1961. Specifically, clause (d) of Section 43(5) excludes eligible transactions in derivatives referred to in Section 2(ac) of the Securities Contracts (Regulation) Act, 1956, carried out on recognized stock exchanges from being considered as speculative transactions [1] [2].

The classification of derivative transactions as non-speculative business income offers significant tax advantages:

• Losses from derivatives trading can be set off against any other income of the same year 
• Any excess loss can be carried forward for up to eight assessment years 
• Such losses can be set off against any other income (except salary) in subsequent years [1] 

This classification is particularly important when contrasted with intraday equity trading, which is considered speculative business income. Unlike intraday equity trading losses that can only be set off against other speculative income, derivative losses enjoy more flexible set-off provisions [3] [2].

2. For Non-Resident Investors

For non-resident investors, including NRIs, the income classification from derivatives follows similar principles as residents. However, there are important restrictions and considerations:

• NRIs can invest in futures and options segments only on a non-repatriation basis using funds held in India [4] 
• Such investments must be made out of Rupee funds held in India, typically through Non-Resident Ordinary (NRO) accounts [4] [5] 
• Foreign Portfolio Investors (FPIs), particularly Category I FPIs, are permitted to invest in exchange-traded derivatives approved by SEBI [6] 

For taxation purposes, non-residents’ income from derivatives is subject to the general provisions applicable to business income under the Income Tax Act, but may also benefit from reduced rates under applicable Double Taxation Avoidance Agreements (DTAAs) [7].

Tax Rates and Recent Changes

1. Securities Transaction Tax (STT)

Budget 2024 introduced significant changes to the STT rates for derivatives trading, effective from October 1, 2024 [8] [9]:

These STT increases were aimed at curbing excessive speculation in derivatives markets and have reportedly reduced market liquidity by 30-40% [9] [10].

2. Income Tax Rates

For resident individuals, income from derivatives trading is taxed as business income at applicable slab rates [3]:

New Tax Regime (post-Budget 2024):

• Up to ₹4 lakhs: Nil 
• ₹4 lakhs to ₹8 lakhs: 5% 
• ₹8 lakhs to ₹12 lakhs: 10% 
• (and higher slabs accordingly) 

For non-resident investors, standard tax rates for business income apply, subject to the provisions of applicable Double Taxation Avoidance Agreements [7].

3. Accounting and Audit Requirements

Given that derivatives income is classified as business income, traders must:

• File ITR-3 (or ITR-4 if under presumptive taxation scheme) [1] 
• Maintain books of accounts as per Section 44AA 
• Get accounts audited if turnover exceeds ₹10 crores (for fully digital transactions) [3] 

Turnover for derivatives trading is calculated as the sum of absolute amounts of profits and losses, not just the net trading value [3].

Taxation Framework for Listed Equity Shares

Classification of Income from Equity Investments

1. For Resident Indian Investors

Income from equity investments can be classified either as:

• Capital Gains: When shares are held as investments with the primary intention of earning dividends and long-term appreciation 
• Business Income: When shares are frequently traded as part of regular business activity 

The classification depends on the investor’s intent, frequency of transactions, holding period, and other factors. However, in practice, listed equity shares held for more than 12 months are typically treated as capital assets [11].

2. For Non-Resident Investors

For non-resident investors, income from equity investments is generally classified as capital gains unless the non-resident is engaged in the business of trading securities. NRIs can invest in listed equity shares through the Portfolio Investment Scheme (PIS) on both repatriation and non-repatriation basis [12] [13].

Foreign Portfolio Investors (FPIs) registered with SEBI are specifically authorized to invest in listed shares, and their income is taxed under special provisions including Section 115AD of the Income Tax Act [14].

Tax Rates and Recent Changes

1. Securities Transaction Tax (STT)

STT rates applicable for equity transactions (unchanged in Budget 2024) [15] [16]:

2. Capital Gains Tax

Budget 2024 introduced significant changes to capital gains tax rates for equity investments, effective from July 23, 2024 [17] [18]:

These rates apply to both resident and non-resident investors, including FPIs. However, non-residents may be eligible for beneficial rates under applicable Double Taxation Avoidance Agreements [19] [7].

3. Grandfathering Provisions

The grandfathering provisions introduced in Budget 2018 continue to apply. For listed shares acquired before February 1, 2018, the cost of acquisition for computing long-term capital gains is deemed to be the higher of:

• Actual cost of acquisition 
• Lower of:
  • Fair Market Value (FMV) as of January 31, 2018 
  • Actual sale consideration 

This effectively protects gains accrued up to January 31, 2018, from taxation [18] [20].

Regulatory Framework for Derivatives and Equity Investments

Regulatory Structure and Authorities

The regulatory framework for derivatives and equity investments in India involves multiple authorities:

• Securities and Exchange Board of India (SEBI): Primary regulator for securities markets, including derivatives and equity trading 
• Reserve Bank of India (RBI): Regulates foreign exchange transactions and oversees foreign investments 
• Ministry of Finance: Formulates policies related to taxation and certain aspects of foreign investment 
• Stock Exchanges: National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) implement and enforce trading rules 

Regulatory Requirements for Resident Investors

Resident Indian investors face relatively fewer regulatory restrictions when investing in derivatives and equity markets:

• Must have a valid Permanent Account Number (PAN) 
• Must complete KYC procedures with registered intermediaries 
• Required to have a demat account with a depository participant 
• Must adhere to position limits set by SEBI and exchanges for derivatives trading 

For derivatives, specific position limits apply to ensure market integrity [21]:

• For index-based contracts: Disclosure required for persons holding 15% or more of open interest 
• For stock options and single stock futures: Position limited to higher of:
  • 1% of free float market capitalization (in terms of number of shares), or 
  • 5% of open interest in all derivative contracts in the same underlying stock 

Regulatory Framework for Non-Resident Investors

1. Investment Routes for Non-Residents

Non-resident investors have several routes to invest in Indian securities markets [22] [23]:

• Foreign Direct Investment (FDI): For strategic, long-term investments, typically 10% or more in unlisted companies or listed companies 
• Foreign Portfolio Investment (FPI): For financial investments in listed securities through SEBI-registered FPIs 
• Foreign Venture Capital Investment (FVCI): For investments in specific sectors with regulatory benefits 
• Non-Resident Indian (NRI) Route: Specific provisions for NRIs investing through Portfolio Investment Scheme (PIS) 

2. NRI Investments: Portfolio Investment Scheme (PIS)

NRIs investing in Indian equities and derivatives must comply with the Portfolio Investment Scheme [12] [13]:

• Must open a PIS account with an authorized dealer bank designated by RBI 
• All purchases and sales must be routed through the designated bank 
• Can invest on repatriation basis (through NRE/FCNR accounts) or non-repatriation basis (through NRO accounts) 
• Investment in derivatives is permitted only on non-repatriation basis 
• Cannot engage in intraday trading or short selling; delivery is mandatory for equity transactions [4] 

Investment limits for NRIs [13]:

• Individual NRI limit: 5% of paid-up capital of the company 
• Aggregate NRI limit: 10% of paid-up capital (can be increased to 24% by special resolution of the company) 

3. Foreign Portfolio Investors (FPIs)

FPIs are subject to the SEBI (Foreign Portfolio Investors) Regulations, 2019, with recent amendments in 2024 [24] [25]:

• Must register with SEBI through Designated Depository Participants (DDPs) 
• Categorized into two categories based on risk profile and regulatory oversight in home jurisdiction 
• Can invest in listed shares, derivatives, units of mutual funds, REITs, and other permitted securities [26] 
• Investment limit of less than 10% of the paid-up equity capital of a company (on fully diluted basis) 
• If exceeding the 10% limit, must either divest excess holdings within 5 trading days or reclassify as FDI [27] 

Recent regulatory developments for FPIs in 2024-25 include [28] [24]:

• Enhanced disclosure requirements for large FPIs 
• Framework for dealing with securities post expiry of registration 
• Procedures for reclassification of FPI investment to FDI 
• Simplified registration process for certain categories of FPIs 

FEMA Implications for Non-Resident Investors

Regulatory Framework under FEMA

The Foreign Exchange Management Act, 1999 (FEMA) and its various regulations govern all aspects of foreign exchange transactions, including investments by non-residents in Indian securities [22]:

• FEMA Non-Debt Instruments Rules, 2019: Govern equity investments by non-residents 
• FEMA Debt Instruments Regulations, 2019: Govern investments in debt instruments 
• Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations: Prescribe methods for payments and reporting requirements [29] 

A key regulatory development is the bifurcation of authority between the Central Government (for non-debt instruments) and RBI (for debt instruments) introduced by the Finance Act, 2015 and implemented through subsequent rules and regulations [30].

Banking Arrangements and Repatriation

1. For NRIs

NRIs must maintain specific bank accounts for investing in Indian securities [12] [5]:

• Non-Resident External (NRE) Account: For investments on repatriation basis; funds are freely repatriable including capital gains 
• Non-Resident Ordinary (NRO) Account: For investments on non-repatriation basis; repatriation subject to annual limits and tax clearance 
• Foreign Currency Non-Resident (FCNR) Account: Foreign currency deposits that can be used for investments on repatriation basis 

Repatriation rules [13] [4]:

• Sale proceeds of shares purchased on repatriation basis can be credited to NRE/FCNR/NRO accounts 
• Sale proceeds of non-repatriable investments can only be credited to NRO accounts 
• Investments in derivatives can only be made on non-repatriation basis using funds from NRO accounts 

2. For FPIs

FPIs operate through designated custodian banks and Special Non-Resident Rupee (SNRR) accounts [31]:

• Must appoint a SEBI-registered custodian for securities and funds 
• Investments and divestments are freely repatriable, subject to payment of applicable taxes 
• May open foreign currency accounts outside India for holding funds pending utilization or repatriation [29] 

Reporting Requirements

Non-resident investors and their authorized dealers must comply with various reporting requirements [32] [31]:

• For NRIs under PIS: Designated banks report transactions to RBI on a daily basis 
• For FPIs: Custodians report transactions through the SEBI’s reporting system 
• LRS Reporting: For resident individuals investing abroad under the Liberalized Remittance Scheme 
• Annual Return on Foreign Liabilities and Assets: Required for Indian companies with foreign investment 

Recent changes include stricter beneficial ownership disclosure requirements for FPIs and standardized procedures for reclassification from FPI to FDI [27].

Practical Compliance Considerations

Registration and Account Opening

1. For Resident Investors

• Obtain PAN and complete KYC with intermediaries 
• Open trading and demat accounts with registered broker and depository participant 
• Complete in-person verification and other onboarding requirements 

2. For Non-Resident Investors

NRIs [33] [5]:

• Open NRE/NRO accounts with an authorized dealer bank 
• Apply for PIS permission from the designated bank 
• Open NRI-specific trading and demat accounts with brokers and depository participants 
• Provide additional documentation including:
  • Valid passport and visa 
  • Overseas address proof 
  • PAN card 
  • PIS permission letter 

FPIs [24] [25]:

• Apply for registration with SEBI through a Designated Depository Participant 
• Complete KYC including ultimate beneficial owner disclosures 
• Appoint a custodian for securities and funds 
• Open special non-resident rupee accounts 

Trading Restrictions and Position Limits

1. For Resident Investors

• Subject to position limits for derivatives contracts set by SEBI and exchanges 
• No restrictions on delivery-based or intraday equity trading 

2. For Non-Resident Investors

NRIs [4] [34]:

• Cannot engage in intraday trading or short selling in equities 
• Must take delivery of shares purchased and give delivery of shares sold 
• Can trade in derivatives only on non-repatriation basis 
• Subject to the same position limits as resident clients in derivatives markets 

FPIs [26] [28]:

• Category I FPIs can invest in exchange-traded derivatives 
• Subject to investment limits and position limits prescribed by SEBI 
• Investments in a single company limited to less than 10% of paid-up equity capital 
• Aggregate FPI limit is 24% of paid-up capital (can be increased up to sectoral cap) 

Taxation and Compliance Calendar

Key compliance requirements for both resident and non-resident investors:

Conclusion and Key Takeaways

Comparative Framework Summary

Recent Developments and Future Outlook

The Indian securities market has undergone significant regulatory changes in 2024-25:

• Increase in STT rates for derivatives trading effective October 1, 2024 
• Increase in capital gains tax rates for equity investments effective July 23, 2024 
• Enhanced disclosure requirements for FPIs 
• Simplified registration process for certain categories of FPIs 
• Standardized procedures for reclassification from FPI to FDI 

These changes reflect a regulatory approach focused on:

• Curbing excessive speculation in derivatives markets 
• Enhancing transparency in foreign investments 
• Streamlining compliance requirements 
• Increasing tax revenues from financial market transactions 

As India continues to integrate with global financial markets, further regulatory refinements are expected to balance market development with prudential oversight. Investors should stay updated on regulatory changes and ensure compliance with evolving requirements.

Key Considerations for Investors

For Resident Investors:

• Maintain proper documentation to support income classification 
• Consider tax implications when choosing between derivatives and equity investments 
• Comply with position limits and reporting requirements for derivatives trading 
• Plan for increased tax outflows due to higher STT and capital gains tax rates 

For Non-Resident Investors:

• Choose appropriate investment route based on investment objectives and repatriation needs 
• Understand and comply with FEMA regulations and reporting requirements 
• Maintain proper documentation for claiming DTAA benefits 
• Be aware of restrictions on trading strategies, particularly for NRIs 
• Monitor regulatory changes that could impact investment strategies and compliance obligations 

By understanding the distinct regulatory and tax frameworks applicable to different investor categories, both resident and non-resident investors can develop effective investment strategies while ensuring compliance with Indian laws and regulations.

Sources:

Judgements

1. Pankaj Agarwal,Kanpur vs Jt.Cit Circle-1(1)(1), Kanpur on 22 April … 

Legislation

1. Circular No. 1/2024 :Circular explaining the provisions of the Finance Act, 2023​ 

Web Articles

1. Income Tax for Foreign Investors 
2. Contract Specifications, Equity Derivatives – NSE India 
3. SEBI Turnover Fees, STT and Other levies 
4. NishithDesai 
5. Foreign Portfolio Investment in India 
6. FandO Taxation in India: Everything an F&O Trader Should Know … 
7. Income Tax On Intraday Trading – How Profits From Intraday Trading … 
8. Opportunities in GIFT City — Fund Formation 
9. FM Nirmala Sitharaman doubles STT on F&O in Budget 2024 | Stock … 
10. Budget 2024: Collected ₹1500 cr of STT last year, can increase to … 
11. Capital gains tax: Will Budget 2025 bring relief to investors? | Stock … 
12. Budget 2024 | STT hike to curb excessive speculation in F&O market … 
13. Securities Transaction Tax (STT)- Features, Tax Rate and Applicability 
14. Budget 2024: Taxation related to capital gains in equity market … 
15. FAQs – NRI Trading Account 
16. How different is stock market investing for NRIs? | Stock Market News 
17. Regulatory Compass Updates & Key Rulings – Securities – India 
18. NishithDesai 
19. Nishith Desai Associates The Financial Services Bulletin 
20. Part C- Shortlisted Articles for Wadia Gandhi Awards for Structured … 

In the contemporary competitive job market, companies are constantly seeking innovative ways to attract and retain top talent. Employee Stock Option Plans (hereinafter ESOPs) have emerged as a popular tool, offering employees a stake in the company’s success and fostering a sense of ownership. ESOPs have become a game-changer, offering employees a chance to foster a sense of ownership in the company and to partake in its success. But ESOPs are more than just a fancy perk in a landscape where talent reigns supreme; understanding how the process flow works, the tax implications involved in India, and the factors that influence the exercise price – the price employees pay for the stock – is crucial for both employers and employees.

What Are ESOPs (Employee Stock Ownership Plans)?

An Employee Stock Ownership Plan (ESOP) is a powerful financial tool that enables employees to purchase shares of the company they work for at a predetermined price, known as the exercise price, within a specific time frame, referred to as the vesting period. This structured program is often used by companies, particularly startups, to offer equity-based compensation to their employees.

ESOPs are not just financial incentives; they are designed to create a strong sense of ownership among employees, aligning their goals with those of the company’s shareholders. This alignment can significantly enhance employee engagement, productivity, and overall company performance. In addition to fostering a high-performance culture, ESOPs serve as an effective strategy for attracting top talent and retaining employees by providing long-term financial benefits.

By offering stock options as part of a compensation package, ESOPs can incentivize employees to contribute to the company’s growth and success. Moreover, these plans help companies build a committed workforce with a shared vision of the organization’s future.

Benefits of ESOPs

Employee Stock Ownership Plans (ESOPs) offer numerous advantages for both employees and companies. One of the primary benefits of ESOPs is their ability to align the interests of employees with the company’s shareholders. By granting employees ownership stakes in the company, ESOPs incentivize them to focus on the long-term success and growth of the organization.

Key Benefits of ESOPs

• Boosts Company Culture and Loyalty
  By empowering employees with equity, ESOPs build a stronger company culture rooted in collaboration and loyalty. Employees who are invested in the company’s future are more likely to contribute to a positive work environment and align with the company’s mission.
• Enhanced Employee Engagement
  ESOPs help foster a sense of ownership and accountability among employees. When employees have a direct stake in the company’s success, they are more likely to stay motivated, work efficiently, and contribute to achieving company goals.
• Increased Productivity and Company Performance
  Employees with stock options are more inclined to go above and beyond in their roles. By tying their compensation to company performance, ESOPs encourage employees to take initiatives that directly benefit the company’s profitability, leading to sustained growth.
• Attract and Retain Top Talent
  As one of the most effective tools for employee retention, ESOPs provide valuable financial incentives. They serve as a competitive edge for businesses looking to attract skilled talent, especially in industries where top candidates are highly sought after. ESOPs also encourage long-term commitment, reducing employee turnover.
• Tax Advantages for Employees and Employers
  ESOPs can offer tax benefits for both employees and employers. Employees may benefit from tax deferrals on the appreciation of stock, and companies can often deduct the cost of stock contributions, making ESOPs an efficient tool for both parties.

Why Companies Choose ESOPs

Companies leverage ESOPs not only as an employee incentive but also as a strategy for succession planning and ownership transition. ESOPs can help business owners transfer ownership gradually, ensuring continuity and stability within the organization.

How do ESOPs Work?

An Employee Stock Ownership Plan (ESOP) is a powerful financial tool that provides employees with an opportunity to own a part of the company they work for. The ESOP implementation process involves several well-defined stages, from the initial agreement on terms to the final allotment of shares. Here’s a detailed breakdown of how ESOPs work:

1. Finalizing ESOP Terms

The first step in implementing an ESOP is defining the terms of the ESOP policy. This includes:

• Granting Conditions: Determining the total number of options to be issued and the eligibility criteria (who can receive options).
• Vesting Schedule: Setting the timeline for when employees can begin exercising their options (often based on years of service or performance milestones).
• Exercise Price: Deciding on the price at which employees can purchase the shares (this is typically set at the fair market value at the time of granting).

These terms must be carefully negotiated and finalized, ensuring they align with company goals and legal requirements.

2. Adoption of ESOP Policy

Once the terms are finalized, the company must adopt the ESOP policy. This involves:

• Board Approval: The company’s board of directors reviews and approves the ESOP policy.
• Shareholder Resolution: A resolution must be passed by the shareholders to formally adopt the policy.
• Legal Compliance: Ensure that the ESOP policy complies with regulatory requirements, such as those laid out by SEBI and other governing bodies.

This step ensures that the ESOP structure is legally binding and officially approved by the company’s governing bodies.

3. Granting of ESOPs

Eligible employees (as per the policy) are granted stock options. This is done through the issuance of grant letters, which clearly outline:

• The number of options granted.
• The vesting schedule.
• The exercise price.
• Any additional terms and conditions.

This stage marks the formal beginning of the ESOP process for each employee.

4. Vesting of ESOPs

Vesting refers to the process by which employees become eligible to exercise their ESOP options. The vesting schedule determines when and how employees can unlock their stock options. Vesting can occur based on:

• Time-based criteria: Employees earn stock options over a period (e.g., 4 years with a 1-year cliff).
• Performance-based criteria: Vesting is tied to meeting specific company or individual performance goals.

The vesting schedule helps retain employees by encouraging long-term commitment to the company.

5. Exercising ESOPs

After vesting, employees can choose to exercise their options and purchase the shares at the pre-set exercise price. This process involves:

• Submitting Exercise Requests: Employees submit a request to exercise their options, following the procedures outlined in the grant letter and ESOP policy.
• Payment of Exercise Price: Employees must pay the exercise price to convert their options into actual shares.

Exercising options allows employees to convert their stock options into ownership in the company, benefiting from the company’s growth.

6. Payment of Exercise Price

Employees are required to pay the exercise price to purchase the shares. The payment can be made through:

• Cash Payment: Employees pay the set exercise price in cash.
• Stock Swap: Employees may use any previously held company stock to exercise their options (if permitted).

This step is crucial for employees to convert their stock options into actual ownership.

7. Allotment of Shares

Once the exercise price is paid, the company issues shares to the employee. The shares are allotted from the ESOP pool, which is the set number of shares reserved for employee stock options. Key points to note include:

• ESOP Pool Management: If the ESOP pool is exhausted, the company may increase the pool to grant more shares.
• Share Issuance: The company officially transfers the shares to the employee’s name.

Upon completion of this process, the employee becomes a shareholder in the company, holding actual equity.

Please see the image below describing the process flow of ESOPs:

We have provided a brief description of the important terms used in the ESOP process flow below:

Quantitative Guidelines for ESOPs: Pool Size & Vesting Periods

When structuring an Employee Stock Ownership Plan (ESOP), it’s essential to define the ESOP pool size and vesting periods clearly. Here are the key guidelines:

1. ESOP Pool Size:
   
   • Typically, companies allocate 5-15% of total equity for the ESOP pool, depending on the company’s size and stage.
   • The size of the pool should balance between incentivizing employees and maintaining control for existing shareholders.
     
2. Vesting Periods:
   
   • Standard Vesting: Usually spans 4 years, with a 1-year cliff. This means no options vest in the first year, and thereafter, 25% of the options vest annually.
   • Vesting periods can be adjusted based on company needs, but gradual vesting ensures employees are committed for the long term.

What is the eligibility criteria for the grant of ESOPs?

The eligibility criteria for the grant of ESOPs vary depending on whether the company is publicly listed or privately held. Here’s a breakdown of how ESOPs are governed and who is eligible to receive them:

For Publicly Listed Companies

For publicly listed companies, the Securities and Exchange Board of India (SEBI) regulates the grant of ESOPs. These companies must comply with strict guidelines to issue stock options to employees. SEBI’s regulations ensure that public companies follow a structured approach while granting ESOPs, including transparency and fairness in allocation.

For Private Companies

Private companies are governed by the Companies Act, 2013 and the Companies (Share Capital and Debenture) Rules, 2014. Under these regulations, private companies can grant ESOPs to the following categories of individuals:

1. Permanent Employees:
   • Employees working in India or abroad.
   • Full-time permanent employees who contribute significantly to the company’s growth.
     
2. Directors:
   • Whole-time directors (excluding independent directors).
   • Directors who are directly involved in the day-to-day operations of the company.
     
3. Subsidiary and Holding Companies:
   • Employees and directors of subsidiary companies (both in India and outside India).
   • Employees and directors of the holding company.
     

Exclusions from ESOP Eligibility

The legal definition of an employee under the Companies Act excludes the following categories from being eligible for ESOPs:

1. Promoters and Promoter Group:
   • Employees who are part of the promoter group or are promoters of the company are not eligible for ESOPs.
     
2. Directors with Significant Shareholding:
   • Any director who holds, either directly or indirectly, more than 10% of the company’s equity shares (through themselves or their relatives or any associated body corporate) is not eligible for stock options.
     

Special Exemption for Startups

Startups are granted a special exemption. For the first 10 years from their incorporation/registration, promoters and directors with significant shareholding (holding more than 10% equity) can still be eligible for ESOPs, despite the usual exclusion under the Companies Act.

Key Takeaways:

• Public companies are governed by SEBI’s regulations, while private companies follow the Companies Act, 2013.
• Employees, directors, and subsidiary staff can qualify for ESOPs under certain conditions.
• Promoters and large shareholders (over 10%) are generally excluded, except for startups in their first 10 years.

Tax Implication of ESOPs – Explained through an Example

Understanding the tax implications of Employee Stock Ownership Plans (ESOPs) is important for both employees and employers. Below is a detailed example illustrating how ESOPs are taxed in India, along with the concept of tax deferrals for eligible startups.
Example: Mr. A’s ESOP Tax Calculation

Let’s assume Mr. A, an employee of Company X (not classified as an eligible startup under Section 80-IAC of the Income Tax Act, 1961), has been granted 100 ESOPs, each granting the right to purchase one equity share in the company.

• Number of ESOP options granted: 100
• Exercise price: INR 10 per share
• Fair Market Value (FMV) on exercise date: INR 500 per share
• FMV on the date of sale: INR 600 per share
  

Now, let’s calculate the tax implications at two key stages: Exercise of ESOPs and Sale of ESOPs.

1. Tax on Exercise of ESOPs

When Mr. A exercises his options, the difference between the FMV at exercise and the exercise price is treated as salary income, which will be taxed accordingly.

2. Tax on Sale of ESOPs

When Mr. A sells the shares, the capital gain is calculated as the difference between the sale price and the FMV at exercise. Since the FMV at exercise (INR 500) is used to determine the cost of acquisition for capital gain tax purposes, the sale of shares results in a capital gains tax liability.

Tax Calculation Summary for Mr. A

Total Taxable Income:

Total Taxable Income: INR 59,000
Salary Income (Exercise): INR 49,000
Capital Gains (Sale): INR 10,000

Deferred Tax Liability for Startups

For employees working in eligible startups, there is an option to defer tax payment, reducing the immediate financial burden when exercising ESOPs.

Eligibility for Tax Deferral:

For eligible startups, the following conditions must be met:

• The company must be registered as a startup under Section 80-IAC of the Income Tax Act.
• The startup must obtain an Inter-Ministerial Board Certificate.
• Tax deferral is available for ESOPs granted by these eligible startups.
  

How Tax Deferral Works:

For employees of eligible startups, tax is not immediately payable when the options are exercised. Instead, the tax liability will arise at the earliest of the following events:

1. 48 months from the end of the relevant financial year.
2. The date the employee sells the shares.
3. The date the employee ceases to be employed by the company granting the ESOPs.

This provision ensures that employees in eligible startups can defer taxes until a later date, helping startups offer ESOPs without imposing immediate tax liabilities on their employees.

Detailed ESOP Calculation Example

Understanding the valuation and taxation of Employee Stock Ownership Plans (ESOPs) is crucial for both employees and employers. Below is a comprehensive example illustrating how to calculate the value of ESOPs, incorporating key factors such as exercise price, fair market value (FMV), and vesting schedules.

Scenario: ESOP Grant Details

• Number of ESOPs Granted: 1,000
• Exercise Price: ₹150 per share
• Fair Market Value (FMV) at Exercise: ₹500 per share
• Vesting Period: 4 years (25% per year)
• Exercise Date: End of Year 4

1. Determining the Value of ESOPs at Exercise

The value of ESOPs at the time of exercise is calculated by subtracting the exercise price from the FMV at exercise:

Per Share Gain = FMV at Exercise – Exercise Price

Per Share Gain = ₹500 – ₹150 = ₹350

Total Gain = Per Share Gain × Number of Shares

Total Gain = ₹350 × 1,000 = ₹3,50,000

2. Accounting for Vesting Schedule

Given the 4-year vesting period, 25% of the total ESOPs vest each year. Assuming all options have vested by the end of Year 4, the total gain is fully realized in that year.

3. Tax Implications at Exercise

The gain realized upon exercise is considered a perquisite and is taxed as salary income. Assuming a tax rate of 30%, the tax liability at exercise would be:

Tax Liability = Total Gain × Tax Rate

Tax Liability = ₹3,50,000 × 30% = ₹1,05,000

4. Sale of Shares and Capital Gains

If the shares are sold at a later date, the capital gain is calculated as the difference between the sale price and the FMV at exercise. Assuming the shares are sold for ₹600 per share after 1 year:

Capital Gain per Share = Sale Price – FMV at Exercise

Capital Gain per Share = ₹600 – ₹500 = ₹100

Total Capital Gain = Capital Gain per Share × Number of Shares

Total Capital Gain = ₹100 × 1,000 = ₹1,00,000

If the holding period exceeds 24 months, the gain qualifies as long-term capital gain (LTCG), which is taxed at 20%.

LTCG Tax = Total Capital Gain × LTCG Tax Rate

LTCG Tax = ₹1,00,000 × 20% = ₹20,000

Summary Table

Determining the exercise price of a stock option

The exercise price is a crucial element of a stock option and denotes the predetermined rate at which an employee can procure the company’s shares as per the ESOP agreement. This price is established at the time of granting the option and remains fixed over the tenure of the option. 

Factors Influencing Exercise Price

• Fair Market Value (FMV): This is a key benchmark. Ideally, the exercise price should be set close to the FMV of the stock on the grant date. However, there can be variations depending on the company’s life stage, liquidity, and overall ESOP strategy. The exercise price is often tethered to the prevailing market value of the company’s shares. If the existing market value exceeds the exercise price, the option is considered “in the money,” rendering it more lucrative for the employee. Conversely, if the market value falls below the exercise price, the option is “out of the money,” potentially reducing its attractiveness.

• Company Objectives: The ESOP policy outlines the rationale behind granting stock options and the intended benefits for employees. A lower exercise price can incentivize employees and align their interests with the company’s growth.

• Dilution Impact: Granting options increases the company’s outstanding shares. The exercise price should consider the dilution impact on existing shareholders. The inherent volatility in Indian stock markets significantly impacts the exercise price. Heightened volatility tends to inflate option premiums, including the exercise price, owing to the increased likelihood of significant price fluctuations in the underlying shares.

• Accounting and Legal Considerations: Indian Accounting Standards (Ind AS) and tax implications need to be factored in to ensure proper financial reporting and tax treatment. Tax consequences can vary based on the timing of the exercise and the type of ESOP. 

Deep Dive into the Indian Legal Framework Governing ESOPs

Employee Stock Ownership Plans (ESOPs) in India are governed by a robust legal framework comprising the Companies Act, 2013, Securities and Exchange Board of India (SEBI) Regulations, and the Foreign Exchange Management Act (FEMA). These regulations ensure that ESOPs are implemented transparently, fairly, and in compliance with Indian laws.

1. Companies Act, 2013

The Companies Act, 2013 serves as the primary legislation governing the issuance of ESOPs in India. Key provisions include:

• Section 2(37): Defines an “employee stock option” as a right granted to directors, officers, or employees of a company or its holding or subsidiary company, allowing them to purchase or subscribe to the company’s securities at a future date at a predetermined price.
• Section 62(1)(b): Mandates that the company must obtain shareholder approval through a special resolution for issuing ESOPs.
• The Companies (Share Capital and Debentures) Rules, 2014: Specifies the procedure for issuing ESOPs by unlisted companies, including the requirement for a special resolution and compliance with prescribed disclosures.
  

2. SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021

For listed companies, SEBI’s regulations provide a comprehensive framework for ESOPs:

• Regulation 4: Outlines the eligibility criteria for employees to participate in ESOP schemes.
• Regulation 5: Requires companies to obtain shareholder approval through a special resolution for implementing ESOP schemes.
• Regulation 6: Mandates the disclosure of the ESOP scheme details to the stock exchanges and the public.
• Regulation 7: Specifies the pricing mechanism for the securities to be issued under the ESOP scheme.
• Regulation 8: Sets forth the vesting and exercise conditions for the options granted.
• Regulation 9: Addresses the treatment of ESOPs in case of resignation, termination, or death of the employee.
  

3. Foreign Exchange Management Act (FEMA), 1999

FEMA governs the issuance of ESOPs to non-resident employees and the repatriation of funds:

• Regulation 8: Allows Indian companies to issue ESOPs to employees or directors of holding companies, joint ventures, or wholly owned subsidiaries outside India, subject to compliance with sectoral caps and other conditions.
• Regulation 9: Specifies the conditions under which non-resident employees can exercise their stock options and the repatriation of proceeds.
• Regulation 10: Requires companies to submit reports to the Reserve Bank of India (RBI) regarding the issuance and exercise of ESOPs.
  

4. Startup India Initiative

Recognizing the importance of ESOPs in attracting and retaining talent, the Government of India has introduced relaxations for startups:

• Tax Deferral: Eligible startups can defer the tax liability on ESOPs until the sale of shares or 48 months from the end of the relevant financial year, whichever is earlier.
• Eligibility Criteria: Startups must be incorporated for less than 10 years, have an annual turnover not exceeding ₹100 crore, and work towards innovation, development, or improvement of products or processes.
  

Disadvantages of ESOPs

While Employee Stock Ownership Plans (ESOPs) offer significant benefits, they come with certain disadvantages:

1. Dilution of Equity: Issuing ESOPs increases the number of shares, which dilutes existing shareholders’ equity and control.
2. Complex Administration: Managing an ESOP scheme involves complex legal, financial, and regulatory requirements, making it time-consuming and costly.
3. Tax Implications: Employees face tax liabilities at both the exercise and sale stages, which could lead to financial strain.
4. Stock Price Volatility: The value of ESOPs is tied to the company’s stock price, which can fluctuate, potentially reducing their value over time.
5. Retention Risk: ESOPs may not always lead to long-term retention if employees fail to see the long-term benefits or if the stock price does not grow as expected.

Comparison of ESOPs vs RSUs vs Phantom Shares

This comparison helps clarify the key differences between ESOPs, RSUs, and Phantom Shares, enabling companies to choose the best option for incentivizing employees based on their goals and financial structure.

Conclusion

In a nutshell, ESOPs have emerged as a significant instrument in India’s corporate landscape, fostering a sense of ownership and alignment between employees and companies. Understanding the key features including the process flow, tax implications and exercise price determination associated with ESOPs is paramount for companies to highlight maximized potential benefits to employees. 

In India, tax exemptions for startups are crucial for encouraging innovation and promoting the growth of new businesses. These exemptions are part of various government schemes and tax laws designed to help startups reduce their financial burden, especially during the initial years of operation. By offering tax relief, the government aims to create an environment that fosters entrepreneurship, investment, and job creation.

In 2026, several tax exemptions are available to startups in India, including those under Section 80-IAC of the Income Tax Act and the Startup India program. These provisions offer startups the opportunity to receive substantial tax benefits, enabling them to reinvest their savings into business development, technology, and talent acquisition. In this section, we’ll explore what tax exemptions are available, how they benefit startups, and why they are so essential for the startup ecosystem in India.

What is Tax Exemption for Startups in India?

Tax exemption for startups in India refers to the financial benefits provided by the government to encourage the growth and development of new businesses. These exemptions are designed to reduce the tax burden, especially during the initial years of operation, allowing startups to reinvest savings into business expansion, research, and innovation.

India offers various tax exemptions under schemes like Startup India and tax provisions within the Income Tax Act. These exemptions are available to eligible startups in the form of tax holidays, capital gains exemptions, and exemptions on angel tax. By providing these incentives, the government aims to create an ecosystem that supports the success of startups, fostering an environment where entrepreneurship can thrive.

Key tax exemptions for startups in India include:

• Section 80-IAC: Tax holiday for startups, exempting them from income tax for the first three years.
• Section 54GB: Capital gains exemption for reinvestment in eligible startups.

These provisions allow startups to direct more of their resources into scaling their business rather than spending on taxes.

Why Are Tax Exemptions Important for Startups?

Tax exemptions play a crucial role in the development and sustainability of startups in India. Here’s why these exemptions are vital:

1. Financial Relief for Startups
   Tax exemptions help startups manage high operating costs and reinvest savings in product development, marketing, and hiring, easing early financial challenges.
2. Encouragement for Investment
   Tax exemptions attract investors by reducing risks, with Section 80-IAC offering relief to angel investors and the Startup India initiative incentivizing investments in innovative businesses.
3. Fostering Innovation
   With reduced financial pressure, startups can focus on R&D, leading to innovations that fuel growth and benefit the economy.
4. Promoting Job Creation
   As startups grow, tax savings allow them to hire more talent, reducing unemployment and fostering career opportunities.
5. Boosting the Economy
   Startups drive economic growth by creating jobs, attracting investments, and enhancing productivity, supported by tax exemptions that nurture the ecosystem.

Eligibility Criteria for Startup Tax Exemptions

To qualify for startup tax exemptions in India, businesses must meet certain criteria outlined under the Startup India program and relevant tax provisions like Section 80-IAC of the Income Tax Act. These exemptions are designed to support early-stage companies by reducing their tax liabilities, thereby helping them focus on growth, innovation, and development.

Who is Eligible for Startup Tax Exemption in India?

The Indian government provides startup tax exemptions under the Startup India initiative. To avail of these exemptions, businesses must fulfill the following eligibility criteria:

1. DPIIT Recognition

• DPIIT (Department for Promotion of Industry and Internal Trade) recognition is a mandatory requirement for startups to claim tax exemptions under the Startup India program.
• The startup must apply for DPIIT recognition, which is a certification that validates the business as an eligible startup.
• DPIIT Recognition is crucial because it allows startups to access various benefits, including tax exemptions, funding opportunities, and other government initiatives aimed at supporting business growth.
  

2. Business Type and Nature

• Startups must be engaged in innovation, development, or improvement of products or services that provide a scalable business model.
• The nature of the business should not include infrastructural activities, real estate, or other excluded sectors.
• The business should focus on technology, manufacturing, e-commerce, agriculture, and other sectors that contribute to economic growth.
  

3. Age of the Business

• To be recognized as a startup, the business should not be more than 10 years old from its date of incorporation or registration.
• This age limit ensures that only newly established companies can avail of the tax exemptions aimed at providing support during their early growth phase.
  

4. Annual Turnover

• Startups must have an annual turnover that does not exceed INR 100 Crores in any financial year to be eligible for tax exemptions.
• This condition ensures that the exemption benefits are provided to smaller, high-potential companies, rather than well-established businesses.
  

Key Criteria for Section 80-IAC Eligibility

Section 80-IAC of the Income Tax Act offers significant tax exemptions to eligible startups, allowing them to enjoy a tax holiday for the first three years. To qualify for this exemption, startups must meet the following specific criteria:

1. DPIIT Recognition for Section 80-IAC

• As mentioned earlier, obtaining DPIIT recognition is a prerequisite for claiming benefits under Section 80-IAC. Without this recognition, a startup cannot claim the tax holiday or other tax exemptions available under the provision.
  

2. Nature of the Business

• The startup must be engaged in innovative and scalable businesses that provide solutions to existing problems or gaps in the market.
• The business should aim to scale rapidly and contribute to the Indian economy, providing job opportunities, technological advancements, or solutions to societal problems.
  

3. Age of the Business

• For Section 80-IAC benefits, startups should be less than 10 years old at the time of claiming the exemption. This ensures that the relief is targeted at young, high-growth businesses.
  

4. Ownership Structure

• The startup must be a private limited company or a limited liability partnership (LLP).
• The startup must not be formed by splitting up or reconstruction of an existing business.
  

5. Indian and Foreign-Funded Startups 

• Section 80-IAC applies to both Indian-funded and foreign-funded startups. Startups can be fully funded by Indian investors or have foreign backing through venture capital, angel investors, or other sources.
• As long as the startup meets the core criteria, such as DPIIT recognition and business nature, both Indian and foreign-funded businesses are eligible for the tax exemptions under this section.
  

Types of Tax Exemptions for Startups

India offers a range of tax exemptions for startups, designed to ease the financial burden on new businesses, foster innovation, and stimulate economic growth. These exemptions are especially beneficial during the early years of operation, when cash flow is typically tight and businesses face significant expenses. Among the most important tax exemptions for startups are Section 80-IAC and Section 54GB tax relief initiatives. 

Section 80-IAC: A Major Tax Exemption for Startups

Section 80-IAC of the Income Tax Act offers one of the most significant tax exemptions for eligible startups in India. It provides a tax holiday for startups, offering a reduction or complete exemption of income tax for the first three years of operation. This exemption is available to DPIIT-recognized startups that meet specific criteria.

Key Benefits:

• Tax Exemption on Profits: Eligible startups are exempt from paying income tax on their profits during the first three years of operation. This is an essential benefit for startups that need to reinvest earnings to scale their operations.
• Encourages Growth and Expansion: By offering a tax holiday, Section 80-IAC allows startups to focus on growing their business, acquiring customers, and expanding their product or service offerings without worrying about tax obligations during the critical early years.
• Eligibility: To qualify, a startup must be recognized by the DPIIT (Department for Promotion of Industry and Internal Trade) and meet specific criteria, including being less than 10 years old and having an annual turnover of less than INR 100 crore.
  

Section 54GB – Capital Gains Exemption for Startups

Section 54GB of the Income Tax Act offers capital gains exemption to individuals and Hindu Undivided Families (HUFs) who invest their capital gains in equity shares of eligible startups. This section is designed to incentivize individuals to invest in startups by providing tax relief on capital gains.

How Section 54GB Helps Startups:

• Capital Gains Exemption: If an individual or HUF sells a long-term asset and reinvests the capital gains in eligible startup equity, the capital gains tax is exempted. This is beneficial for startups, as it attracts investment from individual investors.
• Encourages Investment in Equity: Startups can raise funds through equity investment without the fear of capital gains tax burdens on investors, thereby making it an attractive option for raising capital.
• Conditions for Eligibility: The startup receiving the investment must be registered with DPIIT and meet certain criteria, such as being less than 10 years old and having an annual turnover of less than INR 100 crore.
  

Tax Holiday for Startups in India – What It Means for New Businesses

A tax holiday for startups is a period during which a startup is exempt from paying certain taxes. This exemption is primarily aimed at giving businesses a financial cushion during their early years, when they are most vulnerable.

Overview of Tax Holiday for Startups in India:

• Reduced Financial Burden: Startups can save significantly on taxes during the initial years of operation, allowing them to focus on business development, product innovation, and scaling operations.
• Government Initiatives: The Startup India initiative and other government programs offer tax holidays to DPIIT-recognized startups for the first three years, with some exceptions for a longer duration in specific cases.
• Eligibility Criteria: The startup must be recognized by the DPIIT, and it must be involved in innovation and scalable business models. The company should not exceed an annual turnover of INR 100 crore.
  

Income Tax Exemption for Startups in India under the Startup India Program

The Startup India initiative launched by the Indian government provides several income tax exemptions to promote entrepreneurship and the growth of new businesses.

Key Benefits of the Startup India Tax Exemption Program:

• Tax Holiday for the First 3 Years: Section 80-IAC offers a tax holiday for DPIIT-recognized startups in their initial three years, providing substantial relief to businesses in their early, growth stages.
• Exemption on Capital Gains: The Startup India program also provides capital gains tax exemptions under Section 54GB to encourage investment in startup equity.

Eligibility and Documentation:

• DPIIT Recognition: Startups must be recognized by the Department for Promotion of Industry and Internal Trade to claim the tax exemptions.
• Business Requirements: The business must be involved in an innovative, technology-driven, or scalable business model and meet the age and turnover conditions set by the government.
• Required Documents: To apply for the tax exemptions, startups must submit documentation like the DPIIT recognition certificate, business registration documents, and proof of capital raised or profits generated.
  

Table: Overview of Key Tax Exemptions for Startups

How to Apply for Startup Tax Exemption in India

Applying for startup tax exemptions in India involves a clear and structured process.Below is a concise guide to help startups navigate the application process and claim their exemptions.

Step-by-Step Guide to Apply for Section 80-IAC Exemption 

The 80-IAC exemption offers a tax holiday for startups in India, reducing their tax liability for the first three years of operation. To apply for this exemption, follow these steps:

Step 1: Ensure Eligibility 

• The startup must be DPIIT-recognized.
• The business should be less than 10 years old and have an annual turnover of less than INR 100 crore.
• It must be involved in innovation, development, or improvement of products and services.
  

Step 2: Obtain DPIIT Recognition 

• Apply for DPIIT recognition through the Startup India portal.
• Submit the required documents, including a detailed business plan and proof of innovation or technology.
  

Step 3: Submit Form 1 to the Income Tax Department 

• Complete and submit Form 1 under the Income Tax Act.
• This form can be found on the official Income Tax Department website or through your tax consultant.
  

Step 4: Provide Necessary Documents 

• DPIIT Recognition Certificate
• Incorporation Certificate (Company or LLP)
• Proof of Innovation (business plan, product descriptions, etc.)
• Tax Returns (if applicable)
• Financial Statements
  

Step 5: Await Approval 

• The Income Tax Department will review your application.
• Upon approval, the startup will receive confirmation of the 80-IAC tax holiday.
  

How to Claim the Startup India Income Tax Exemption 

To claim tax exemptions under the Startup India program, businesses must complete a few steps to ensure compliance and access available benefits.

Step 1: Register on the Startup India Portal 

• Visit the Startup India website and register your business. Make sure to provide accurate details about your business and its innovative nature.
• After registration, you’ll receive a DPIIT recognition certificate, which is mandatory for claiming tax exemptions.
  

Step 2: Apply for Tax Exemption 

• Once registered, fill out the required forms for income tax exemptions under Section 80-IAC.
• Ensure that all documentation supporting your business’s eligibility is included, such as your business plan and turnover details.
  

Step 3: Submit Documents for Angel Tax Exemption 

• If applicable, submit necessary documents for angel tax exemption to ensure investors are not taxed on their investments in your startup.
  

Step 4: Meet Deadlines 

• Important deadlines for filing applications and claiming exemptions are typically tied to the financial year.
• Ensure timely submission of your tax forms and documents before the due dates to avoid any delays.
  

Step 5: File Income Tax Returns 

• Once you’ve submitted all necessary forms, file your Income Tax Returns (ITR) as per the regular tax deadlines to officially claim the exemptions.
  

Important Deadlines and Forms

• Form 1 (DPIIT Registration): To be submitted when applying for DPIIT recognition.
• Form 56: Used for claiming exemptions under Section 80-IAC.
• Income Tax Filing Deadlines: Ensure compliance with annual ITR deadlines to avoid penalties.
  

Startups must be aware of the financial year deadlines and submit their applications and claims on time to benefit from the Startup India tax exemption.

Other Key Tax Benefits for Startups in India

In addition to the well-known Section 80-IAC and Startup India tax exemptions, there are other significant tax benefits available to startups in India. These benefits are designed to incentivize investment and support the growth of innovative businesses.

Section 80-IAC Exemption for Investment in Startups – How Investors Benefit 

Section 80-IAC not only benefits startups but also provides significant relief to investors. The key benefits include:

• Tax Relief on Investments: Investors in DPIIT-recognized startups can avail themselves of tax relief on their investments. This reduces the financial risk for angel investors and venture capitalists.
• Encourages Investment: By offering tax incentives, Section 80-IAC makes startup investments more attractive, fostering a conducive environment for innovation.
  

Tax Benefits Under Section 54GB – Capital Gains and More 

Section 54GB offers capital gains tax exemptions for startups that reinvest capital gains into eligible equity shares of startups. Key points include:

• Capital Gains Exemption: Investors can avoid capital gains tax when reinvesting profits from the sale of long-term assets into startup equity.
• Supports Investment: This exemption helps startups attract investment from individuals looking to reinvest their gains in innovative businesses, promoting further growth.

Common Issues & Pitfalls When Applying for Startup Tax Exemption

Common Mistakes in the 80-IAC Application Process
Startups often miss required documents or fail to meet eligibility criteria like turnover limits or DPIIT recognition. To avoid this, ensure all forms are accurate, complete, and submitted on time.

Issues with Angel Tax and How to Avoid Them
Angel tax issues arise when startups are taxed on equity investments above fair market value. Section 80-IAC removes this burden by exempting DPIIT-recognized startups from angel tax, making it easier for investors to fund startups.

Introduction

Virtual Digital Assets (VDAs) have emerged as a significant investment avenue in India, with cryptocurrencies, non-fungible tokens (NFTs), and other digital assets gaining substantial traction among investors. To regulate this burgeoning sector, the Indian government introduced a comprehensive taxation framework through the Finance Act, 2022, which came into effect from April 1, 2022. With India’s growing adoption of cryptocurrencies, NFTs, and tokens, it’s critical for investors and traders to understand how these Virtual Digital Assets (VDAs) are taxed and reported. Since FY 2022-23, the Income Tax Department has rolled out strict guidelines, leaving no room for guesswork. This blog provides an in-depth analysis of the taxation provisions applicable to VDAs in India, examining various investor scenarios based on residency status and investment platforms.

Understanding Virtual Digital Assets (VDAs)

Definition and Scope

The Finance Act, 2022 introduced Section 2(47A) to the Income Tax Act, 1961, which defines VDAs broadly to include:

• Any information, code, number, or token (not being Indian or foreign currency) generated through cryptographic means or otherwise, providing a digital representation of value 
• Non-fungible tokens (NFTs) or any other token of similar nature 
• Any other digital asset notified by the Central Government 

This expansive definition encompasses cryptocurrencies like Bitcoin and Ethereum, NFTs, and potentially other digital tokens that may emerge in the future. The government has also explicitly excluded certain items from the VDA definition, including gift cards, vouchers, reward points, and airline miles.

Types of VDAs Covered

The Indian taxation regime for VDAs applies to:

• Cryptocurrencies: Including Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, etc. 
• Non-Fungible Tokens (NFTs): Digital assets representing ownership of unique items 
• Other Digital Tokens: Any token that provides a digital representation of value 

However, where an NFT involves the transfer of an underlying tangible property, such NFTs are excluded from the scope of VDAs.

General Taxation Framework for VDAs

Income Tax Provisions

Section 115BBH of the Income Tax Act imposes a flat 30% tax on income derived from the transfer of VDAs, effective from April 1, 2022. Key aspects of this provision include:

• Tax Rate: A flat 30% tax (plus applicable surcharge and cess) on gains from the transfer of VDAs 
• Limited Deductions: No deduction is allowed for any expenditure or allowance except for the cost of acquisition.
• No Set-Off of Losses: Losses arising from the transfer of VDAs cannot be set off against any other income, nor can they be carried forward to subsequent assessment years.
• Individual Asset Class: Each VDA is considered a separate asset class, meaning losses from one VDA cannot offset gains from another VDA.

Tax on VDAs – Section 115BBH

Tax Deducted at Source (TDS) Provisions

Section 194S, introduced by the Finance Act, 2022 and effective from July 1, 2022, requires a 1% TDS on the transfer value of VDAs above specified thresholds:

• TDS Rate: 1% of the transaction value 
• Threshold Limits:
  • Rs. 50,000 during a financial year for specified persons (individuals/HUFs not subject to tax audit) 
  • Rs. 10,000 during a financial year for other persons.
• TDS Collection Method: For transactions through Indian exchanges, the exchange is responsible for deducting TDS.
• Application to In-Kind Payments: TDS applies even when consideration is paid in another VDA, with the acquirer responsible for TDS.

If the deductee fails to provide a PAN, TDS is deducted at a higher rate of 20%.

eg. If you’ve bought or sold crypto above certain thresholds, TDS at 1% kicks in:

• Indian Exchanges auto-deduct TDS.
• On foreign exchanges, you must deduct and deposit TDS.

Tip: Check Form 26AS or AIS to confirm TDS has been credited properly.

Gift Tax Implications

The Finance Act, 2022 also amended Section 56(2)(x) to include VDAs within the definition of “property.” Consequently, receiving VDAs as a gift valued above Rs. 50,000 can trigger tax implications for the recipient.

Resident Indian Investors: Taxation Scenarios

Investment Through Indian Exchanges

For resident Indians investing in VDAs through Indian cryptocurrency exchanges, the taxation framework operates as follows:

Income Tax: Gains from the transfer of VDAs are taxed at a flat rate of 30% (plus applicable surcharge and cess). Only the cost of acquisition can be deducted when calculating gains.

TDS Mechanism: The Indian exchange is responsible for deducting 1% TDS on each sale transaction. This applies to both cryptocurrency-to-fiat and cryptocurrency-to-cryptocurrency transactions.

Reporting Requirements: From the financial year 2023-2024, Income Tax Return (ITR) forms include a separate section called “Schedule – Virtual Digital Assets” for reporting any gains from VDAs.

Investment Through Foreign Exchanges

When resident Indians invest in VDAs through foreign exchanges, additional complexities arise:

TDS Applicability: Section 194S applies only when purchasing VDAs from an Indian tax resident. When trading on international exchanges, the TDS requirements may be different:

• For direct crypto purchases on foreign exchanges, no TDS under Section 194S may apply if the seller is not an Indian resident.
• For P2P transactions on international platforms where the counterparty is an Indian resident, the buyer needs to collect the PAN from each seller and file a TDS return.

Income Tax Liability: Despite potential TDS exemptions, resident Indians are taxable on their global income, including gains from VDAs purchased on foreign exchanges. The 30% tax rate applies regardless of where the transaction occurs.

Non-Resident Indian (NRI) Investors: Taxation Scenarios

NRIs Investing Through Indian Exchanges

For NRIs investing in VDAs through Indian exchanges, the tax implications are as follows:

Applicability of Section 115BBH: The VDA taxation provisions do not distinguish between tax residents and non-residents. Therefore, NRIs are subject to the same 30% tax rate on gains from VDAs acquired through Indian exchanges.

TDS Provisions: The 1% TDS under Section 194S applies to transactions with Indian residents. For NRIs, this would apply when they sell VDAs on Indian exchanges.

DTAA Benefits: Non-residents who are residents of countries with which India has signed a Double Taxation Avoidance Agreement (DTAA) may have the option to be taxed as per the DTAA or the Income Tax Act, whichever is more beneficial. However, most DTAAs do not have specific provisions for VDAs, creating potential ambiguities in interpretation.

NRIs Investing Through Foreign Exchanges

For NRIs investing in VDAs through foreign exchanges, the tax implications depend on the location of the transaction and the source of income:

Offshore Transactions: If an NRI transfers VDAs on exchanges located outside India, from VDA wallets located outside India, and the proceeds are received in bank accounts outside India, such gains may not be taxable in India. This is because the income neither accrues nor arises in India.

Source-Based Taxation: Non-residents are taxed in India on income deemed to accrue or arise in India. The determination of whether income from VDAs accrues in India depends on the situs (location) of the VDA.

As per judicial precedents, the situs of an intangible asset like a VDA owned by a non-resident may be considered to be outside India based on the principle of ‘mobilia sequuntur personam,’ which states that the situs of the owner of an intangible asset would be the closest approximation of the situs of the intangible asset itself.

However, if the VDA transactions occur on an Indian exchange or if the VDAs are issued by an Indian issuer, it becomes difficult to claim that the income does not accrue or arise in India.

Special Considerations for Specific VDA Investments

Cryptocurrency Mining

For individuals engaged in cryptocurrency mining in India, the following tax implications apply:

Taxation of Mining Rewards: Mining income received is taxed at the flat 30% rate under Section 115BBH.

Cost of Acquisition: The cost of acquisition for mined cryptocurrencies is considered “Zero” for computing gains at the time of sale.

Infrastructure Expenses: No expenses such as electricity costs or infrastructure costs can be included in the cost of acquisition or deducted from mining income.

Crypto-to-Crypto Transactions

When exchanging one cryptocurrency for another, both parties may have tax implications:

TDS Obligations: A 1% TDS would be applicable on the transaction value. For example, if using 2000 Ethereum to buy Bitcoin worth the same value, 1% of the Ethereum’s INR value would be payable as TDS.

Capital Gains Calculation: Each exchange is considered a taxable event, requiring calculation of gains based on the INR value of the cryptocurrencies at the time of the transaction.

Bitcoin ETFs and Indirect Exposure

With the recent approval of spot Bitcoin ETFs in the United States, Indian investors now have alternative avenues for crypto exposure:

Investment Route: Indian investors can invest in US-listed Bitcoin ETFs through the Liberalized Remittance Scheme (LRS), which allows remittances up to $250,000 per financial year.

Tax Benefits: Investing in Bitcoin ETFs rather than direct cryptocurrency holdings may offer certain tax advantages:

• The 1% TDS on crypto transactions would not be applicable since no actual crypto is being purchased 
• Capital gains tax would likely be lower than the 30% flat rate applicable to direct VDA holdings 

LRS Considerations: A 20% Tax Collected at Source (TCS) may apply on deposits above Rs. 7 lakhs via LRS. Unlike TDS, this TCS can be used to offset other tax liabilities.

There is ongoing debate about whether Bitcoin ETF units might themselves be classified as VDAs under Indian tax law. However, based on current interpretations, such ETF units may not fall within the definition of VDAs as they don’t meet all the criteria specified in Section 2(47A).

Recent Regulatory Developments and Future Outlook

Recent Regulatory Developments

Several recent developments may impact the taxation of VDAs in India:

G20 Crypto Regulatory Framework: The G20 summit in September 2023 laid the groundwork for a comprehensive regulatory framework for crypto-assets, adopting the Crypto-Asset Reporting Framework (CARF) and amendments to the Common Reporting Standard (CRS).

Spot Bitcoin ETF Approval: The U.S. Securities and Exchange Commission’s approval of spot Bitcoin ETFs in January 2024 has created new investment avenues for Indian investors seeking exposure to crypto assets.

CBDT Clarifications: The Central Board of Direct Taxes has issued clarifications regarding the obligations of exchanges with respect to withholding tax under Section 194S and the mechanism for conversion of tax withheld in VDA to fiat currency.

New Income Tax Bill 2025

The proposed New Income Tax Bill 2025 may bring further changes to VDA taxation:

• Broader Definition: The bill proposes a broader definition of Virtual Digital Assets to encompass evolving digital assets 
• Enhanced Compliance Mechanisms: New provisions for digital access during search operations, including access to virtual spaces, social media accounts, email servers, cloud storage, and trading accounts 
• Undisclosed Income: The bill explicitly includes Virtual Digital Assets within the scope of undisclosed income 

Future Outlook

The taxation framework for VDAs in India continues to evolve, with several potential developments on the horizon:

• Comprehensive Crypto Regulation: A dedicated regulatory framework for cryptocurrencies and other VDAs may emerge, potentially influencing the taxation approach 
• DTAA Amendments: Future amendments to Double Taxation Avoidance Agreements may include specific provisions for VDAs, providing greater clarity for non-resident investors 
• TDS Thresholds Revision: Recent budget proposals have revised thresholds for various TDS provisions, and similar revisions may be considered for Section 194S in the future 

Practical Considerations for Investors

Tax Compliance and Reporting

Investors in VDAs should be aware of the following compliance requirements:

• ITR Filing: A dedicated schedule for VDAs is now included in Income Tax Return forms from FY 2023-24 onwards.
• TDS Compliance: For P2P transactions where TDS is applicable, Form 26QE must be submitted within 30 days from the end of the month when the deduction is made.
• Documentation: Maintaining proper records of all VDA transactions, including acquisition costs and transfer details, is essential for accurate tax reporting 

Tax Planning Strategies

Given the strict tax provisions for VDAs, investors may consider the following strategies:

• Timing of Transactions: Since each VDA transaction is taxable, planning the timing of acquisitions and disposals can help manage tax liabilities 
• Alternative Investment Vehicles: Investing in crypto ETFs or similar products may offer more favorable tax treatment compared to direct cryptocurrency holdings.
• Jurisdictional Considerations: For NRIs, understanding the interplay between Indian tax laws and tax treaties can help optimize tax outcomes.

How to Report VDAs in Your ITR?

What is Schedule VDA?

A new section in ITR forms introduced for declaring:

• Date of acquisition and sale
• Type of VDA (Crypto/NFT/etc.)
• Platform/Exchange used
• Cost and sale value

Which ITR Form Should You Use?

Foreign VDAs & FEMA/Black Money Compliance

If you hold VDAs on foreign wallets or exchanges, you must report them in Schedule FA of your ITR.

Non-disclosure can trigger:

• Penalty under the Black Money Act
• FEMA scrutiny for violation of cross-border investment norms
• Declare all foreign crypto assets even if no transaction was made during the year.

Final Checklist for VDA Reporting

Maintain detailed records of:

• Wallet IDs
• Dates of buy/sell
• Transaction values
• Cost of acquisition

Match TDS entries in Form 26AS
File accurate ITR (use ITR-2/ITR-3 as needed)
Disclose foreign-held crypto in Schedule FA
Consult a tax expert for complex transactions

Conclusion

The taxation framework for Virtual Digital Assets in India is comprehensive but stringent, imposing a flat 30% tax on gains with limited deductions and no loss set-off provisions. The tax implications vary significantly based on the investor’s residency status and the location of the exchange or platform used for transactions.

For resident Indians, all VDA gains are taxable at 30% regardless of where the transaction occurs, while NRIs may have limited exemptions for offshore transactions. The recent emergence of alternative investment vehicles like Bitcoin ETFs offers potential tax advantages compared to direct cryptocurrency holdings.

As the regulatory landscape continues to evolve, investors should stay informed about changes to tax provisions and compliance requirements. A thoughtful approach to VDA investments, considering both investment objectives and tax implications, can help navigate this complex but potentially rewarding asset class.

In early 2025, the USA President Donald Trump announced a new wave of tariffs targeting major U.S. trading partners, including China, Canada, and Mexico¹. These measures are designed to address long-standing trade imbalances and protect domestic industries. However, the immediate effect has been a disruption of global supply chains, prompting American businesses to look for alternative sourcing destinations.

China has historically played a dominant role in U.S. imports, amounting to $439 billion in 2024—down from $505 billion in 2018—reflecting a steady decline that the 2025 tariffs have accelerated². The newly imposed 20% tariff on all Chinese imports in February 2025³ has accelerated this shift and we need to bring out the acceleration of the decline. Among the potential beneficiaries, India emerges as a strong contender, thanks to its growing manufacturing sector, improving ease of doing business, and strategic government initiatives.

This article examines India’s positioning as a viable alternative to China in U.S. imports, analyzing the opportunities, challenges, and strategic implications of this shift.

Current India-U.S. Trade Relations and Opportunities

India-U.S. Bilateral Trade Statistics

India and the U.S. share a strong trade relationship, with total bilateral trade reaching $191 billion in 2024, marking a steady rise from $146 billion in 2019. The U.S. is India’s largest trading partner, accounting for approximately 17% of India’s total exports. (Source: USTR, Ministry of commerce)

Comparison of key sector exports by India to US vis-a-vis China to US

Below table showcases comparison of historical data related to key sector exports by India to US vis-a-vis China to US:

India’s growing share in these critical sectors positions it as an ideal trade partner for the U.S., particularly as tariffs on Chinese goods push American companies to look for new suppliers.

Current trade disruption owing to US imposition of tariffs and India’s Strategic Advantage

U.S.-China Trade War and Its Ripple Effect

The U.S.-China trade relationship has seen turbulence for years, with tariffs and counter-tariffs disrupting supply chains. The latest tariff escalation adds to the strain, making American companies more cautious about relying on Chinese suppliers. This has fueled a growing interest in India as a manufacturing and export hub.

Projected Tariff Impact on U.S. Imports

Source: Impact of US tariffs

Many U.S. multinationals have structured their supply chains around Free Trade Agreements (FTAs). As a result, the imposition of tariffs on previously “non-dutiable” goods could significantly disrupt their sourcing strategies. According to a report on the U.S. tariff industry analysis, these tariffs disproportionately impact sectors such as industrial products, pharmaceuticals, automotive, and consumer electronics. This shift presents a strategic opportunity for India to strengthen its position in U.S. supply chains.

The following figure⁴ provides a detailed breakdown of the top 10 U.S. importer jurisdictions, highlighting tariff rates, recent increases, and the major product categories affected:

To analyze the current vs. proposed tariff state, the below figure⁵ summarizes the prospective annual impact for the top industries with the largest incremental increase of potential tariffs:

India’s Growing Manufacturing Ecosystem

India has made significant strides in manufacturing, driven by the “Make in India” initiative. Despite a modest production growth rate of 1.4% in FY 2023-24 compared to 4.7% in the previous fiscal year⁶, the government remains committed to expanding the sector’s contribution to Gross Value Added (GVA) from 14% to 21% by 2032⁷.

Key policies such as the Production-Linked Incentive (PLI) scheme have attracted over $17 billion in investments, spurring production worth $131.6 billion and creating nearly one million jobs in just four years⁸.

Business-Friendly Environment

“India improved its global standing in the past, ranking 63rd out of 190 countries in the World Bank’s Doing Business Report 2020⁹¹⁰. This is the result of pro-business reforms, including:

• Liberalization of foreign investment rules
• Modernized Insolvency and bankruptcy laws
• Elimination of retrospective taxation
• Jan Vishwas (Amendment of Provisions) Act, 2023, which decriminalized 183 provisions across 42 Central Acts¹¹
• Introduction of beneficial taxation regime for newly started manufacturing companies

Workforce availability & skill development

With a labor force exceeding 500 million, India provides an abundant and cost-effective workforce. The non-agricultural sector alone added 11 million jobs from October 2023 to September 2024, bringing total employment in this sector to 120.6 million¹².

To further enhance workforce readiness, the Indian government is investing heavily in skill development programs to align with industry needs.

Key sectors poised to gain from the U.S. tariffs on China

Electronics & Manufacturing

India’s manufacturing sector has been experiencing steady growth, with manufacturing GDP increasing from $327.82 billion in 2015 to $440.06 billion in 2022¹³. The Production-Linked Incentive (PLI) scheme has played a crucial role in accelerating this growth, particularly in electronics manufacturing. A report highlights that companies like Foxconn and Samsung are set to receive over ₹4,400 crore under the smartphone PLI scheme, indicating significant investments and expansions in India’s electronics manufacturing sector¹⁴. India is benefiting from U.S. import diversification, and reports also highlight that disruptions in semiconductor and communication equipment imports from China could create significant opportunities for India in certain sectors.

Information Technology (IT) and Software Services

India’s Information Technology (IT) exports have continued their upward trajectory in the fiscal year 2023-24. According to the Press Information Bureau (PIB), India’s services exports, which encompass IT services, reached approximately $341.1 billion¹⁵ in 2023-24. The United States is India’s largest IT services market, and with trade restrictions on China, U.S. firms are increasingly turning to Indian companies for solutions in:

• Artificial Intelligence (AI) and automation
• Cloud computing and cybersecurity
• Enterprise software development

India’s IT giants, including TCS, Infosys, and Wipro, are strengthening their digital transformation capabilities to meet rising demand from U.S. businesses.

(Source: Statista, Moneycontrol)

Pharmaceuticals

India has long been regarded as the “pharmacy of the world”, with pharmaceutical exports growing significantly. Some key pharmaceutical trade statistics are given below:

• Export Value (2023-24): $27.85 billion
• API Market Growth: 12% CAGR
• U.S. Dependency on China: India exports antibiotics and APIs, but China still holds a dominant share (95% ibuprofen, 91% hydrocortisone, 70% acetaminophen)

While specific data on above API exports is limited, India’s overall antibiotics exports have been significant. In 2023, antibiotics constituted approximately 0.233% of India’s total exports, amounting to around $1 billion.

The U.S. heavily relies on China for active pharmaceutical ingredients (APIs), but recent restrictions on Chinese pharmaceutical imports have pushed American firms to seek alternative suppliers. India, with its cost-effective drug manufacturing capabilities and stringent quality standards, is well-positioned to fill this gap.

(Source: PIB,  Bain, Reuters, Prosperousamerica, Trend economy)

Textiles & Apparel

In the financial year 2023-24, India’s textiles and apparel exports, including handicrafts, was $35.87 billion which is a significant portion of India’s overall exports. The ongoing U.S.-China trade tensions have prompted global retailers to diversify their supply chains, and India, with its strong cotton and synthetic fiber production, is emerging as a key beneficiary.

Additionally, India’s share of global trade in textiles and apparel stands at 3.9%, with major export destinations including the USA and the European Union, accounting for approximately 47% of total textile and apparel exports.

Several multinational brands have started shifting their sourcing operations to India, further boosting exports in this labor-intensive sector. (Source: Ministry of textiles, PIB)

Automotive Components

India’s auto component exports ($21.2 billion in 2023-24) are growing, but tariffs on Mexico (100 to 200% on some auto goods) are expected to have the most severe impact on the U.S. auto supply chain. The industry’s expansion reflects its resilience and adaptability, with exports increasing from $10.8 billion in 2015 to $21.2 billion in 2023-24. 

With U.S. tariffs on Chinese auto parts, Indian manufacturers are gaining a competitive edge. India has already established itself as a leading supplier of engine components, braking systems, and electrical parts for major U.S. automakers. If India continues enhancing its production capacity and quality standards, it could capture a significant share of the U.S. auto parts market.

(Source: India briefing,  ACMA)

U.S. Importer’s perspective – Costs, Tariffs & Compliance

Tariffs on Indian Imports

• Understanding Tariff Classifications: U.S. importers must classify Indian goods under the Harmonized Tariff Schedule (HTS) to determine duty rates.
• Most-Favored-Nation (MFN) vs. Additional Duties: Indian goods are generally subject to MFN rates but may attract anti-dumping duties in some cases.
• Avoiding Additional Tariffs: Importers can benefit from tariff exclusions available under the Generalized System of Preferences, which remains suspended for India as of 2025, but may be reinstated pending negotiations.

U.S. import & customs compliance

• Customs Documentation: Importers must file following documents:
  • Commercial Invoice
  • Packing List
  • Bill of Lading / Airway Bill
  • Certificate of Origin (preferably digitally signed)
  • Importer’s Customs Bond (in the US)
  • FDA/USDA Clearance (for food, beverages, cosmetics, pharmaceuticals, agri goods)
  • Lacey Act Declaration (for wood, paper, plants)
    
• Time for Customs Clearance: Sea shipments take 5-7 days at ports like Los Angeles; air shipments clear in 1-3 days.

Regulatory & Compliance Requirements

Depending on the product category, several US federal agencies may require additional clearances:

• The FDA (Food & Drug Administration) governs imports of food, cosmetics, drugs, medical devices, and dietary supplements. Prior notice and facility registration may be required.
• The USDA (Department of Agriculture) and APHIS monitor animal-origin or plant-based goods.
• The CPSC (Consumer Product Safety Commission) sets safety rules for toys, electronics, household goods, etc.
• The FCC regulates electronic goods with wireless or radio frequency components.
• The EPA handles goods containing chemicals or pollutants.

Additionally, under the Lacey Act, importers must declare wood or plant-based product origins (e.g., wooden furniture, paper).

Also, if you’re importing chemicals, ensure compliance with TSCA (Toxic Substances Control Act) by submitting the required certifications.

Logistics & Supply Chain Challenges

• Freight Costs: Container shipping from India to the U.S. costs $4,000–$6,000 per 40-ft container.
• Port Congestion Risks: Delays at major U.S. ports can add 7-14 days to shipping times.

Taxation for U.S. Importers

• State-Specific Taxes: Certain states levy additional import processing fees.
• Transfer Pricing Compliance: If importing from an Indian subsidiary, IRS requires arms-length pricing.

Indian Exporter’s Perspective – Taxation, Duties & Incentives

Income Tax for Exporters

Basic tax rate of 22% for companies, 15% for new manufacturing firms.

GST on Exports & Refund Process

• GST is Zero-Rated for exports, meaning exporters can claim full refunds.
• Letter of Undertaking (LUT) Filing: Required to export without paying GST upfront.
  • How to Apply? Log into the GST portal → Select “Services” → Choose “User Services” → File LUT.
  • Deadline: LUT must be filed before the start of the fiscal year.
• Common Refund Delays: ITC mismatches, incorrect bank details, missing supporting documents.

Export Duties & Government Incentives

• RoDTEP (Remission of Duties and Taxes on Exported Products): Refunds 2-5% of FOB value.
• Duty Drawback Scheme: Exporters get a refund on customs duties paid on inputs.
• PLI Scheme: Government provides financial incentives to exporters in electronics, textiles, and pharma.

Forex & Banking Regulations

• Export Payment Realization: As per RBI, exporters must receive payment within 9 months from the date of shipment.
• Letter of Credit (LC) vs. Open Account: LCs provide payment security but require bank guarantees.
• Hedging Forex Risk: Exporters can use forward contracts to protect against rupee depreciation.

Customs Clearance & Logistics in India

• Time for Export Clearance: Air shipments clear in 1-2 days, while sea shipments take 3-5 days.
• DGFT Compliance: Exporters must register with the Directorate General of Foreign Trade (DGFT) and obtain an Import Export Code (IEC).

Further, if the payment is on account of royalties, technical services, software access, or licensing fees, then US tax laws under Section 1441 may apply. In such scenarios, the Indian exporter would have to furnish a Form W-8BEN (in case of individuals) or W-8BEN-E (in case of entities) in order to avail US-India Double Taxation Avoidance Agreement (DTAA) benefits.

External Perspectives: How the World is Reacting

• Trade Diversion Effects: During the 2017–2019 U.S.- China trade war, India emerged as the fourth-largest beneficiary of trade diversion, with exports to the U.S. increasing from $57 billion in FY18 to $73 billion in FY19. A similar trend is expected in 2025¹⁶.
• Exporter Sentiment: Indian exporters report a rise in orders, indicating shifting trade preferences.
• Stock Market Reactions: Short-term volatility has been observed, but long-term prospects remain strong. 
• Diplomatic Engagements: India nears the global average in trade relationships, reflecting its broad connections with Asia, Europe, and the United States. This diversified trade network underscores India’s potential to strengthen its position in global trade realignment¹⁷.
• Vietnam and Indonesia have experienced significant surges in FDIs as manufacturers shift operations away from China¹⁸. However, India is also leading FDI inflows and the same is evident from cumulative FDI inflow of $667.4 billion between 2014 and 2024¹⁹. 

Future Outlook: The Road Ahead for India

The global trade realignment presents a unique opportunity for India to emerge as a critical manufacturing and export hub. However, to fully capitalize on this shift, continued investment in infrastructure, regulatory simplifications, and supply chain improvements are necessary.

With strategic planning and collaboration between the government and industries, India can cement its role as a reliable trade partner for the U.S., fostering economic growth and deeper bilateral ties.

Conclusion

India stands at a pivotal moment in global trade realignment. With proactive policies, strong sectoral growth, and a favorable geopolitical environment, the country is well-positioned to replace China in several U.S. import categories. The coming years will be critical in shaping India’s trajectory as a global manufacturing powerhouse.

1. 
   References:
   [1] https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-imposes-tariffs-on-imports-from-canada-mexico-and-china/ ︎
2. [2] https://libertystreeteconomics.newyorkfed.org/2025/02/u-s-imports-from-china-have-fallen-by-less-than-u-s-data-indicate/ ︎
3. [3]  https://www.whitecase.com/insight-alert/us-tariffs-canada-and-mexico-enter-effect-tariff-china-rises-10-20/  ︎
4. [4]  https://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-us-tariff-industry-analysis-private-equity.pdf  ︎
5. [5]  https://www.pwc.com/us/en/tax-services/publications/insights/assets/pwc-us-tariff-industry-analysis-private-equity.pdf  ︎
6. [6]  https://www.india-briefing.com/news/india-manufacturing-tracker-2024-25-33968.html/  ︎
7. [7] https://economictimes.indiatimes.com/news/economy/indicators/indias-manufacturing-sectors-contribution-to-gva-will-surge-to-21-by-2032-from-14-now-report/articleshow/116793951.cms  ︎
8. [8] https://www.reuters.com/world/india/indias-manufacturing-incentives-progress-amid-efforts-cut-china-imports-2024-09-25/ ︎
9. [9]  Note: The World Bank has since replaced the Doing Business Report with the Business Ready (B-READY) report, launched in October 2024. However, as of April 2025, a comparable global ranking for India under this new framework is not yet available. ︎
10. [10]  https://www.makeinindia.com/india-jumps-14-places-world-banks-doing-business-report-2020  ︎
11. [11]  https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2003540 ︎
12. [12]  https://www.reuters.com/world/india/indias-small-businesses-added-11-million-jobs-202324-2024-12-24 ︎
13. [13]  https://www.macrotrends.net/global-metrics/countries/ind/india/manufacturing-output ︎
14. [14] https://www.business-standard.com/industry/news/foxconn-apple-samsung-to-receive-rs-4-400-cr-under-smartphone-pli-scheme-124030400126_1.html ︎
15. [15]  https://pib.gov.in/PressReleasePage.aspx?PRID=2098447 ︎
16. [16]  https://blog.lukmaanias.com/2025/02/11/the-impact-of-trumps-trade-war/ ︎
17. [17]  https://www.mckinsey.com/mgi/our-research/geopolitics-and-the-geometry-of-global-trade ︎
18. [18] https://www.mckinsey.com/industries/logistics/our-insights/diversifying-global-supply-chains-opportunities-in-southeast-asia ︎
19. [19]  https://pib.gov.in/PressReleasePage.aspx?PRID=2058603 ︎

Here’s a comprehensive breakdown of the key changes and what they mean for you:

1. Revised Income Tax Slabs (New Tax Regime)

Under the default New Tax Regime (Section 115BAC), income tax slabs have been revised for FY 2025-26 onwards:

• 0%: Income up to ₹4,00,000
  
• 5%: ₹4,00,001 – ₹8,00,000
  
• 10%: ₹8,00,001 – ₹12,00,000
  
• 15%: ₹12,00,001 – ₹16,00,000
  
• 20%: ₹16,00,001 – ₹20,00,000
  
• 25%: ₹20,00,001 – ₹24,00,000
  
• 30%: Above ₹24,00,000
  

Note: The Old Tax Regime remains optional and unchanged.

2. Higher Rebate Under Section 87A

The rebate limit under the New Tax Regime has been increased to ₹60,000 (from ₹25,000). This means individuals earning up to ₹12,00,000 annually will have zero tax liability under the new regime.

The rebate for the Old Regime remains unchanged at ₹12,500 (up to ₹5 lakh income).

3. Increased TDS Thresholds

Multiple TDS sections now have higher deduction limits, reducing unnecessary withholding and easing compliance:

• Other TDS sections remain unchanged

4. TCS Changes (Effective April 2025)

• Other TCS provisions remain unchanged.

5. Capital Gains Tax on ULIPs

Redemption proceeds from ULIPs (Unit Linked Insurance Plans) will now be taxed as capital gains if:

• The premium exceeds 10% of the sum assured, or
  
• The annual premium is more than ₹2.5 lakhs
  

This ends the long-standing ambiguity and brings parity with mutual fund taxation.

6. Higher LRS Limit & TCS Relief on Education Loans

• The threshold for TCS on foreign remittances under Section 206C(1G) has been raised from ₹7 Lakhs to ₹10 Lakhs per financial year.
  
• No TCS will be applicable on remittances for education, if funded through educational loans from specified financial institutions.
  
• These changes aim to ease compliance and reduce the tax burden on students and families funding overseas education.

7. Updated Return (ITR-U) – 4-Year Filing Window

The time limit for filing Updated Tax Returns (ITR-U) has been extended to 48 months (4 years) from the end of the relevant assessment year.

This move encourages voluntary disclosure of previously missed or under-reported income.

Applicable from FY 2025-26 onwards

8. Start-up Tax Exemption Extended

Start-ups can now avail 100% tax exemption for 3 consecutive years out of 10 years from the year of incorporation under Section 80-IAC if they are:

• Incorporated on or before 1st April 2030
• Eligible under DPIIT criteria and other prescribed conditions

9. Extended Tax Benefits for IFSC Units

• The sunset date for starting operations to claim tax concessions in IFSC units has been extended to 31st March 2030.
  
• Under Section 10(10D), the entire maturity amount of a life insurance policy purchased by a non-resident from an IFSC office is fully exempt, with no premium limit.

Final Thoughts

These updates signal a shift toward simplification, transparency, and digital compliance in India’s tax ecosystem. But with so many rule changes across income tax, TDS, TCS, and capital gains — staying compliant is more critical than ever.

1. Multi-Factor Authentication (MFA) – Mandatory for All Taxpayers
   To enhance security measures, all taxpayers will be required to implement Multi-Factor Authentication (MFA) when accessing GST portals. This initiative is designed to protect sensitive financial data and prevent unauthorized access. Businesses should ensure that their authorized personnel are equipped with the necessary tools and knowledge to comply with this requirement.
2.  E-Way Bill Restrictions 
   Effective January 1, 2025, the generation of E-Way Bills will be restricted to invoices issued within the preceding 180 days, with extensions capped at 360 days. Additionally, the National Informatics Centre (NIC) will introduce updated versions of the E-Way Bill and E-Invoice systems to enhance security and compliance. Businesses must adapt their logistics and invoicing processes to align with these new timelines and system updates.
3. Mandatory Sequential Filing of GSTR-7 
   Taxpayers filing GSTR-7, which pertains to Tax Deducted at Source (TDS) under GST, must now adhere to a sequential filing order without skipping any filing numbers.  This measure aims to ensure accurate reconciliation of Input Tax Credit (ITC) and streamline the TDS collection process. Thereby improving the efficiency ofTDS collections and facilitating timely Input Tax Credit (ITC) claims for taxpayers.​
4. Biometric Authentication for Directors
   Starting March 1, 2025, Promoters and Directors of companies, including Public Limited, Private Limited, Unlimited, and Foreign Companies, will be required to complete biometric authentication at any GST Suvidha Kendra (GSK) within their home state. This change simplifies the authentication process by eliminating the need to visit jurisdiction-specific GSKs, thereby enhancing the ease of doing business.
5. Mandatory Input Service Distributor (ISD) Mechanism
   From 1st April 2025, the ISD mechanism will be mandatory for businesses to distribute ITC on common services like rent, advertisement, or professional fees across GST registrations under the same  Permanent Account Number (PAN). Businesses must issue ISD invoices for ITC distribution and file GSTR-6 monthly, due by the 13th of each month. The ITC will be reflected in GSTR-2B of receiving branches for use in GSTR-3B filing. Non-compliance will result in the denial of ITC and penalties ranging from ₹10,000 to the amount of ITC availed incorrectly.
6. Adjustments in GST Rates for Hotels and Used Cars
   Hotel Industry: The “Declared Tariff” concept will be abolished, with GST now calculated based on the actual amount charged to customers. Hotels offering accommodation priced above ₹7,500 per unit per day will be classified as “specified premises” and will attract an 18% GST rate on restaurant services, along with the benefit of ITC. New hotels can opt for this rate within 15 days of receiving their GST registration acknowledgment.​
   Used Cars: The GST rate on the sale of old cars will increase from 12% to 18%, impacting the pre-owned car market and potentially leading to higher tax liabilities for businesses dealing in used vehicles.
7. Implementation of New Invoice Series and Turnover Calculation
   Starting 1st April 2025, businesses will be required to begin using a new invoice series to maintain accurate records and ensure a smooth transition into the new financial year with updated compliance requirements. Additionally, businesses must recalculate their aggregate turnover to determine if they are liable to take GST registration or issue e-invoices. This calculation will help assess their compliance obligations for GST registration, the QRMP Scheme, GST filing, and e-invoicing in the new financial year.
8. Introduction of GST Waiver Scheme 2025
   Businesses that have settled all tax dues up to March 31, 2025, may be eligible for a GST waiver under schemes SPL01 or SPL02, provided they apply within three months of the new fiscal year. This initiative offers a tax relief opportunity for compliant taxpayers.
9. Enhanced Credit Note Compliance
   Recipients of credit notes must now accept or reject them through the Integrated Management System (IMS) to prevent ITC mismatches. This protocol ensures transparency and accuracy in ITC claims, reducing discrepancies in tax filings.
10. Changes in GST Registration Process (Rule 8 of CGST Rules, 2017)
    As per recent updates to Rule 8 of the Central Goods and Services Tax (CGST) Rules, 2017, applicants opting for Aadhaar authentication must undergo biometric verification and photo capturing at a GSK, followed by document verification for the Primary Authorized Signatory (PAS). Non-Aadhaar applicants are required to visit a GSK for photo and document verification. Failure to complete these processes within 15 days will result in the non-generation of the Application Reference Number (ARN), thereby delaying the registration process.

The forthcoming GST amendments underscore the government’s commitment to refining the tax system, enhancing compliance, and fostering a transparent business environment. It is imperative for businesses to proactively understand and implement these changes to ensure seamless operations and avoid potential penalties. Engaging with tax professionals and leveraging updated compliance tools will be crucial in navigating this evolving landscape effectively.

1. Belated Return: Filing After the Due Date

The original deadline for filing your ITR for the Financial Year (FY) 2024-25 is 31st July 2025. If you miss this deadline, you still have the option to file a Belated Return by 31st December 2025. However, filing a belated return comes with certain consequences:

• Late Filing Fees: Under Section 234F of the Income Tax Act, a penalty is imposed based on taxable income:
  • INR 5,000 for individuals with an income above INR 5 lakh.
  • INR 1,000 for individuals with income up to INR 5 lakh.
• Interest on Tax Dues: If you have unpaid taxes, an interest of 1% per month (under Section 234A) is applicable on the outstanding tax amount until the date of filing.
• Ineligibility for Carry Forward of Losses: Losses under the heads “Capital Gains” or “Profits & Gains from Business & Profession” cannot be carried forward if you file a belated return.

Filing a belated return is always better than not filing at all, as non-filing can lead to additional penalties, scrutiny, and even prosecution in some cases.

2. Revised Return: Correcting Mistakes in Filed ITR

If you have already filed your ITR but later realize that there are errors—such as incorrect income details, missing deductions, or misreported figures—you can rectify these mistakes by filing a Revised Return under Section 139(5).

• The last date to file a revised return for FY 2024-25 is 31st December 2025.
• There is no limit to how many times you can revise your return, as long as the revised return is filed within the deadline.
• The revision process can be done online through the Income Tax e-Filing portal.
• Common mistakes that necessitate a revised return include:
  • Incorrect bank account details.
  • Omission of income sources.
  • Claiming incorrect deductions.
  • Errors in tax computation.

Filing a revised return ensures accurate reporting and can help prevent penalties or scrutiny by tax authorities in case of discrepancies.

3. Updated Return: Rectifying Non-Disclosure of Income

From April 2022, the government introduced the concept of an Updated Return (ITR-U) under Section 139(8A), allowing taxpayers to voluntarily update their tax filings for missed or additional income declarations. This option provides a safety net for those who may have:

• Forgotten to declare certain income.
• Underreported taxable earnings.
• Realized the need for additional disclosures after filing their return.

Key Conditions for Filing an Updated Return:

• The Updated Return for FY 2024-25 can be filed until 31st March 2028 (within 24 months from the end of the relevant assessment year).
• Restrictions on filing an Updated Return:
  • You cannot file an updated return to declare a loss or carry forward losses.
  • You cannot use an updated return to reduce tax liability.
  • You cannot claim a higher refund than originally declared.
• Additional Tax Liability: Filing an updated return requires payment of additional tax:
  • 25% of the additional tax liability if filed within 12 months from the end of the relevant assessment year.
  • 50% of the additional tax liability if filed after 12 months but before 24 months.

This option provides a way for taxpayers to proactively correct their tax filings and avoid potential notices or penalties in the future.

Which Option Should You Choose?

The choice of whether to file a belated, revised, or updated return depends on your specific situation:

Conclusion

Filing income tax returns on time is always the best course of action, but if you missed the deadline or need to make corrections, the Income Tax Department provides options to rectify and update your filings. Whether you opt for a belated return, revised return, or updated return, understanding the implications of each can help you make an informed decision and stay compliant with tax laws.

As tax laws and deadlines may be subject to change, it’s always advisable to consult a tax professional or refer to the official Income Tax Department portal for the latest updates.

In a significant development for foreign investors, the Delhi High Court recently delivered a landmark judgment in favor of Tiger Global, a Mauritius-based investment firm. The case centered around the sale of Tiger Global’s shares in Flipkart Singapore to Walmart and the applicability of tax benefits under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

The crux of the matter revolved around the Indian tax authorities’ attempt to deny Tiger Global treaty benefits by invoking the General Anti-Avoidance Rule (GAAR). This raised a critical question: can GAAR be used to negate treaty benefits for shares acquired before April 1, 2017, a date that marked significant changes to the India-Mauritius DTAA?

Background: The India-Mauritius DTAA and GAAR

The India-Mauritius DTAA is a tax treaty aimed at preventing double taxation on income earned by residents of either country in the other. This treaty provides benefits such as reduced or no withholding tax on capital gains arising from the sale of shares.

The General Anti-Avoidance Rule (GAAR), introduced in India in 2013, empowers tax authorities to disregard arrangements deemed to be artificial or lacking genuine commercial substance. The purpose is to prevent tax avoidance schemes that exploit loopholes in the tax code.

The Dispute: GAAR vs. Treaty Benefits

In this case, Tiger Global had acquired shares in Flipkart Singapore before April 1, 2017. This was crucial because the India-Mauritius DTAA offered more favorable tax benefits for pre-2017 acquisitions. However, when Tiger Global sold its shares to Walmart, the Indian tax authorities sought to apply GAAR, arguing that the investment structure was merely a tax avoidance scheme.

The Delhi High Court’s Decision

The Delhi High Court ruled in favor of Tiger Global, upholding its entitlement to treaty benefits under the DTAA. The Court’s reasoning rested on several key points:

• Tax Residency Certificate (TRC): The Court acknowledged the Tax Residency Certificate (TRC) issued by the Mauritian government as sufficient proof of Tiger Global’s tax residency in Mauritius. This reaffirmed the importance of TRCs as evidence of tax residency in India.
• Corporate Veil Principle: The Court recognized the legitimacy of complex corporate structures and upheld the “corporate veil principle.” This principle acknowledges that a company is a separate legal entity from its owners.
• Beneficial Ownership: The Court examined the concept of “beneficial ownership” and concluded that Tiger Global, not a US-based individual, held the beneficial ownership of the shares. This countered the argument that Tiger Global was merely a “see-through entity” established solely for tax avoidance.
• “Grandfathering Clause”: The Court considered the “grandfathering clause” within the DTAA, which protected pre-2017 investments from changes introduced after that date. This clause played a significant role in securing treaty benefits for Tiger Global.

Implications of the Decision

This landmark judgment has several significant implications for foreign investors in India:

• Clarity on GAAR and Treaty Benefits: The Delhi High Court ruling provides much-needed clarity on the applicability of GAAR in relation to pre-2017 treaty benefits. 
• Importance of Tax Residency Certificates: The emphasis on TRCs as reliable evidence of tax residency reinforces the importance of obtaining these certificates from the relevant authorities.
• Scrutiny of Complex Structures: While the Court upheld the “corporate veil principle,” it highlights that complex structures may still face scrutiny from tax authorities. 

Looking Forward

The Delhi High Court’s decision is a positive development for foreign investors. It reinforces the sanctity of tax treaties and provides greater clarity on the role of GAAR in such scenarios. However, it is crucial to note that this is a single court judgment, and its interpretation by other courts and tax authorities remains to be seen.

Foreign investors operating in India should stay informed of evolving tax regulations and seek professional advice to ensure their investments comply with all applicable tax laws.

Under the Income Tax Act, equity share transfers must be executed at FMV, as determined by Rule 11UA. According to Rule 11UA of the Income Tax Rules, the FMV is calculated based on the Net Asset Value (NAV).

The NAV is calculated by subtracting total liabilities from total assets. However, special consideration is required for:
1. Investments in Shares and Securities: These must be valued at their fair market value, not book value.
2. Investments in Immovable Property: The value should be the stamp duty value adopted or assessed by any governmental authority. This necessitates obtaining a valuation report from a registered valuer (L&B).

For companies and stakeholders, understanding these nuances is crucial.

Tax Event: 
Shares of a foreign company are deemed to derive its value substantially from India, if on the specified date, the value of shares of Indian company:
– exceeds INR 10 crore (approx. USD 1.2mn); and
– represent at least 50% of the foreign company’s asset value

Key Exemptions
– Small Shareholders: Shareholders holding 5% or less, directly or indirectly
– Category I FPIs

Background
The landmark Vodafone case brought this issue to the forefront. This case involved Vodafone’s acquisition of Hutchison’s stake in a Cayman Islands company, indirectly owning substantial assets in India. The Indian tax authorities claimed tax on the transaction, arguing that the transfer derived significant value from Indian assets. Vodafone contended that the transaction was not taxable under existing laws. The Supreme Court of India ruled in Vodafone’s favor in 2012. However, in response, the Indian government introduced a retrospective amendment to the Income Tax Act, 1961 allowing taxation of such indirect transfers, thereby overturning the Supreme Court’s decision and leading to prolonged legal disputes.

As we navigate the complexities of tax season, ITR Filing is crucial for individuals and businesses alike.

Here’s what we cover in our detailed guide:
1. Understand why filing ITR is essential
2. Who needs to file an ITR
3. Filing requirements
4. Benefits of timely filing & more

This post unpacks the essentials of Tax Deducted at Source (TDS). We’ll guide you through:

1. What TDS is and why it matters
2. When it applies to you & the different forms involved
3. How to file & the benefits of proper TDS compliance
4. Avoiding penalties for non-compliance

Master your tax knowledge & share with your network who might benefit.

• An ESOP pool is a set of shares earmarked for the company’s employees – which will be issued to them under ESOP Scheme.
• Creation of ESOP pool leads to dilution of founder and investor shareholding at the time of creation of the pool.
• The shares forming part of the pool are not issued yet. They are just notionally carved out shares which are represented on the fully diluted cap table of the company.

Sample cap table on a fully diluted basis :

These are just notional shares and not issued to any employee benefit trust*

We have also created a sample cap table with an ESOP pool for your ready reference: Click to know more https://bit.ly/3pYF4zH

Practical Insights

• Founders typically create an ESOP pool of 10-15%. As the company grows and raises rounds of funding, the ESOP pool dilutes to approx. 3-4%
• Mature investors usually ask founders to create an ESOP pool before making investment so that their stake does not dilute during later stages of funding
• Creation of an ESOP pool only requires passing of a simple board resolution.

A tax is a compulsory fee or financial charge levied by the government on the income, profits, occupation, property, transaction, etc. of the taxpayer. It is everyone’s contribution to the fund for making common public expenditures. Basically, taxes are a source of revenue to run the country for economic growth and development. Some also consider it as a transfer of wealth/ contribution from the rich to the poor betterment via the government.

TAXPAYER

Everyone who earns or gets an income in India is subject to income tax. But taxes are collected from those whose income is more than the basic exemption limits prescribed by the government. A taxpayer may be an individual, a partnership firm, a company, the government itself, and any other legal entity. He may or may not be a citizen of India and he may or may not be a resident of India.

TAX COLLECTOR

The Ministry of Finance heads the Department of Revenue, which functions under the direction and control of the Revenue Secretary. He exercises control through two statutory bodies – the Central Board of Direct Taxes (“CBDT”) and the Central Board of Indirect Taxes and Customs (“CBIC”). There are many taxes levied by the state governments and local bodies also.

TYPES OF TAX

There are two groups of tax systems – progressive and regressive. Progressive is the one where the tax rate increases with the taxpayer’s income. While regressive is the one where the tax rate decreases with an increase in income. The former is beneficial for rich people. India follows the progressive tax system.

Direct Taxes

Direct taxes are collected from the person directly. Parliament passes the finance bill every year to give effect to any amendments proposed in the income tax law and to specify the rates of income tax for the purpose of self-assessment tax, advance tax, and tax deducted at source. Eg income tax, equalization levy, etc.

Indirect Taxes

Indirect taxes are the taxes that are imposed on goods and services. They are collected by the source that sells the product/ services thereby increasing the cost of the product/ services. eg. goods and services tax, excise and customs duty, securities transaction tax, commodities transaction tax, entertainment tax, etc.

Other Types

Stamp duty, registration fees, property tax, toll tax.

DIRECT TAX:

Taxable Income

As per the income tax act, the “total income” of the year of a person is charged to income tax. Certain deductions are allowed to be deducted from the total income, eg. investments to provident fund, the premium for life insurance and medical insurance, interest income from the savings bank, principle/ interest paid for a home loan and the education loan, etc. (all these are subject to provisions of the income tax laws).

“Total income” includes the income earned or received or accrued or arose in India or outside India depending on the residential status of the person and other provisions of the law to bring the taxability. The income tax act has not exhaustively defined the term income but extensively covered many types and sources of income.

Direct tax is divided into 5 main categories of income – salary income, income from house property, income from business/profession, capital gains, and income from other sources.

Exempt Income

Certain incomes are treated as exempt, which will not be included in the calculation of total income, eg. agriculture income, house rent allowance, the share of profit derived from partnership firm, gratuity, pension, the amount received under life insurance policy, etc. (all these are subject to provisions of the income tax laws). It is worth noting that exempt income has to be disclosed separately in the return though not under the income statement.

Don’t get confused between deductions and exempt income – deduction reduces total taxable income while exempt income is excluded from total taxable income.

RETURN OF INCOME

To ensure each person that there is a financial record of all the incomes, expenditures, losses, gains, losses, and taxes for each year, a return has to be filed by all those coming under the threshold limits. The return has to be filed annually for the period ranging between April to March i.e. Financial year.

*unless amended/ otherwise notified by CBDT

Please note that the above table has been prepared based on generic detail and may subject to the addition/ deletion of any forms as prescribed by CBDT.

TAX AUDIT

Concept

Audit refers to the official inspection of an organization’s accounts and production of reports. Tax audit is an examination or review of accounts of business or profession carried out by taxpayers from an income tax point of view.

Audit is applicable to any person who:

• Carries on business & sales, having turnover or gross receipts exceeds INR 1 Cr for the financial year. Subsequently, the limit has been increased to 5 Cr and recently in budget’21 to 10 Cr subject to certain conditions.

Simply put – If your turnover exceeds 1 Cr/ 10 Cr as the case may be, have a look at the applicability.

• Carries on profession, having gross receipts exceeds INR 50 Lakhs for the financial year.
• Taxpayer carrying on business or profession & income declared is less than 8% or 6% (i.e. not following presumptive taxation).

Accounts have to be audited by a prescribed accountant within the due dates specified above in form 3CA/3CB and Form 3CD.

PRESUMPTIVE TAXATION

Concept

Presumptive taxation scheme was introduced to give relief to small taxpayers from the tedious work of maintenance of books of accounts. They can compute income on an estimated basis at the rates prescribed.

Once the rates are applied, no other expense can be claimed. The income so generated shall be treated as final income from that business/profession.

Tax Deducted at Source (“TDS”)

Concept

We all love EMIs and so does our government. TDS is one such system that enables us to pay tax on the income as and when we earn it. It is not feasible to pay a large amount in one go and hence it is convenient for the taxpayers as the tax gets deducted automatically. It is one of the steadiest forms of revenue for the government. Tax is withheld at the source (called the deductor) and whose tax is withheld (the deductee) can claim such taxes paid in his return of income.

Example

1. Nisha works for an organization named TLC. TLC will collect all the income and investment declarations and will accordingly compute and deduct tax as per slab rates while paying the monthly salary. Nisha can claim this deducted tax at the time of preparing her return of income.
2. Kunal has given one of his commercial properties on rent to M/s. Sharma Enterprises. The firm shall deduct tax from the rent which is to be paid to Kunal and pay the net rent.

Rates of TDS are :

Individuals and HUF shall deduct TDS only if a tax audit is applicable to them. Others shall always deduct TDS if the threshold is crossed.

#unless amended/ notified by CBDT.

TDS Return

The deductor is responsible to pay the taxes deducted to the government on a monthly basis and also file a compulsory quarterly return. A Tax deduction and collection number (TAN) has to be obtained by the deductor for itself and has to be quoted in the TDS return. The payee (deductee) has to provide his PAN, if the PAN is not provided then the deductor shall deduct tax at the higher rate of 20% (reduced to 5%).

TDS Certificate

Every person deducting tax at source is required to furnish a certificate to the payee to the effect that tax has been deducted along with certain other particulars. This certificate is usually called the TDS certificate. Individuals are advised to request for a TDS certificate wherever applicable.

To view how much of your TDS is deducted for a year, a Form 26AS can be downloaded from the e-filing website. The TDS reflected here can be claimed in the return.

Lower deduction of TDS

If the assessee (other than company or firm) is sure that there is no taxable income for the year, he can submit a self-declaration form (Form 15G or 15H) to the deductor stating that his taxable income is less than the basic exemption limit and so not to deduct TDS on the payment.

If the assessee (everyone) is of the opinion that he would not be paying any tax for the year owing to losses or exemptions or that his yearly tax is going to be less than the total TDS deducted, then he shall make an application for lower or no TDS before the assessing officer (AO) in Form 13. The AO shall assess the application and if satisfied shall grant the permission. This permission letter has to be given to the vendor and shall remain valid for a period as specified by the AO.

These forms also reduce the hassle for claiming refunds every year.

ADVANCE TAX

Concept

It is the “pay-as-you-earn” scheme of the government. The assessee has to pay part of their taxes before the end of the year. The difference between advance tax and TDS is that advance tax is collected from the taxpayer itself whereas TDS is collected from the payee itself.

Monetary limit & Payment

Once the tax amount exceeds INR 10,000, the assessee has to pay advance tax. It applies to all taxpayers excluding those above 60 years of age who have no business income. It is calculated as per normal total income and tax calculations but on an estimated basis and divided as per the following schedule:

However, all taxes paid before 31st March are considered as advance tax. Those having incomes as per presumptive taxation have to deposit the whole advance tax on 15th March. Non-payment or short payment leads to interest charges.

SELF ASSESSMENT TAX

What all tax is left to be paid after TDS and advance tax is self-assessment tax. This is before filing the return of income and after considering all the actual incomes, gains, and deductions of the year on a self computation basis.

Like advance tax, this tax is also directly paid by the assessee but there is no specific due date for the same. Just that it should be on or before filing the return.

BELATED RETURN

If you miss filing your return on the original due date, it can be filed anytime before 31st December of next FY (unless notified by CBDT). But the losses cannot be carried forward to next year (except house property loss). The maximum fine to file a belated return is INR 10,000.

REVISED RETURN

If you have made any mistake in the original return, it can be revised, provided the original one was filed at the right time. Revised return can be filed before 31st December or before your assessment of income is completed (if conducted), whichever occurs earlier (unless notified by CBDT).

ASSESSMENT OF INCOME

Concept

After filing an income tax return, a tax officer may be assigned by the Income Tax department randomly based on certain criteria to undertake an examination. If a taxpayer is selected for scrutiny assessment, the Assessment Officer would issue an income tax notice to the taxpayer for the same.

Notice

Further, the tax officer would request certain information, documents and book of accounts for undertaking the scrutiny assessment. On producing the information and documents requested, the income tax officer would complete an assessment and compute the amount of income and tax payable by the taxpayer.

Appeal

If there is any mismatch in the amount of taxable income or taxes to be paid, the taxpayer could agree with the order passed by the Officer and pay the demand or accept any amount of refund, or loss as determined by the tax officer. Or if not acceptable then file an appeal before the Commissioner (Appeals), further to Tribunal, High Court, and Supreme Court.

EQUALISATION LEVY

Concept

“Whole world is a market place”. It is the era of growing digitalization where everything happens without any physical presence and hence it becomes important for businesses to expand globally. Governments have tax laws to bring under its ambit even the advertisements and marketing income from the overseas market.

equalisation levy is the Indian version to tax the non-residents receiving such online advertising income from resident Indian businesses.

Further, budget’20 has introduced a new equalisation levy to tax the non-resident e-commerce operators.

Example

M/s Infotainment Pvt Ltd paid USD 7,000 to Facebook. The company need to deduct an equalisation levy @ 6% while making payments to Facebook.

Monetary Limits & Return

Old equalisation levy –

The aggregate amount of services rendered by the non-resident to one party should exceed INR 1 Lakh to trigger the levy. It is an indirect tax whereby the payer (Indian) has to deduct tax @ 6% while paying to the service provider (non-Indian).

New equalisation levy –

The aggregate amount of gross receipts/ turnover of such non-resident e-commerce operators from online sales of goods or services should be INR 2 crores in a year to trigger the levy. It is a tax whereby the e-commerce operator (non-Indian) has to collect tax @ 2% on consideration received from the service provider (Indian).

The above practice of tax deduction is followed by paying the tax to the central government and return filing (Form 1) on or before 30 June of the relevant year.

Here are some tax efficiency strategies for businesses, including startups, to reduce their overall tax liability and maximize earnings:

1. Proper Book Keeping

Keeping accurate financial records is paramount to managing business expenses properly. Many business expenses are tax-deductible, so keeping detailed financial statements and receipts will help you to claim all eligible tax deductions and credits.

2. Registration Under Start-Up India Initiative

Start-ups that are registered under the Start-Up India program are eligible for various tax benefits such as tax holidays, angel tax exemption, and more. By taking advantage of this initiative, startups can save money on taxes and allocate those resources to other areas of their business.

3. Donations and Charity

Donations made to registered charities and funds are tax-deductible. Giving back to the community not only earns goodwill but can also attract tax benefits. So, consider donating to a registered charity or fund to help your community while also saving money on taxes.

4. Plan Your Investments

Consider investing in tax saving schemes or SIPs. These investment accounts offer tax benefits that can help you save money and also prepare for your retirement.

5. Correct Deduction of Taxes at Source

Non-deduction of taxes could lead to the disallowance of the entire expense or part thereof for tax purposes. Hence, ensure you’re deducting taxes, where applicable, and at the correct rates in force to avoid any tax disallowance or tax penalty.

6. Depreciation

Manufacturing companies can avail of additional tax benefits by claiming depreciation on the purchase of new plants & machinery. Make sure to keep accurate records of all capital expenditures to claim these deductions.

By adopting these tax efficiency strategies, businesses, including startups, can save a considerable amount of money on taxes each year, which can be used to reinvest and grow their business. With proper financial planning, businesses can avoid unnecessary expenses and maximize their earnings potential.

FAQs

Q: What is the importance of proper bookkeeping for tax efficiency in businesses?

A: Proper bookkeeping is crucial for tax efficiency as it allows businesses to keep accurate financial records, enabling them to claim all eligible tax deductions and credits. This helps reduce their overall tax liability and maximize earnings.

Q: How can startups benefit from registering under the Start-Up India initiative?

A: Start-ups registered under the Start-Up India program are eligible for various tax benefits, including tax holidays and angel tax exemption. By taking advantage of these incentives, startups can save money on taxes and allocate those resources to other areas of their business.

Q: Can donations and charity contribute to tax savings for businesses?

A: Yes, donations made to registered charities and funds are tax-deductible. By donating to a registered charity or fund, businesses can both support their community and save money on taxes.

Q: How can planning investments help in tax savings for businesses?

A: Planning investments in tax-saving schemes or Systematic Investment Plans (SIPs) can provide businesses with tax benefits. These schemes not only help save money on taxes but also assist in preparing for retirement.

Q: Why is correct deduction of taxes at source important for businesses?

A: Correctly deducting taxes at source is crucial to avoid disallowance of expenses or tax penalties. Non-deduction of taxes could lead to the disallowance of the entire expense or part thereof for tax purposes.

Q: How can manufacturing companies benefit from claiming depreciation on new plants and machinery?

A: Manufacturing companies can avail additional tax benefits by claiming depreciation on the purchase of new plants and machinery. Keeping accurate records of capital expenditures is essential to claim these deductions.

Social media influencers are individuals who are engaged online in building a community platform via social media channels like Instagram, Facebook, Youtube, TikTok and many others.

During the 2020 Covid pandemic, there was an exponential increase in the number of influencers and content creators surfacing on these platforms. They were seen garnering a huge number of followers and brand partnerships.

With TV advertising decreasing and companies wanting to increase their digital brand awareness, brands nowadays reach out to influencers for promotions. Typically influencers receive freebies consisting of branded products as “PR packages” or affiliate coupon codes (customised with the influencer’s name) in exchange for the influencer promoting the brand’s product on their social platforms. This is referred to as a “Barter Collaboration” wherein an influencer receives a PR package and in return tries out the product or service and reviews it for the public. There is no money involved in this entire process.

New Development

Section 194R of Income Tax Act, 1961 : Deduction of tax on benefit or perquisite in respect of business or profession

194R. (1) Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall ensure that tax has been deducted in respect of such benefit or perquisite at the rate of 10% of the total value of such benefit or perquisite before providing the benefit or perquisite to such resident:

Businesses are not required to withhold TDS under the provisions of this section in the following cases: If the total value of the benefit or perquisite provided or likely to be provided to a resident does not exceed INR 20,000/- in a financial year.

If such benefit or perquisite is being provided by an individual or Hindu Undivided Family (HUF) with total sales, receipts, or turnover less than INR 1 crore (for businesses) or INR 50 lakhs (for professions) in a financial year.

This section was inserted in the Finance Act, 2022 and shall be effective from July 1, 2022.

“Person responsible for providing” means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer.

Analysis of the new provision

In an interesting development, social media influencers will now receive PR Packages after the brand deducts tax at 10% of the value of the products sent (provided the influencer decides to keep the products). This regulation has come as a response to the fact that many influencers were not showing gifts received from brands as promotional income since no actual payment was made to them.

Impact on Influencers

Universally, individuals prefer being paid in cash than in-kind. Many influencers believe that this is a positive change since the content creation industry was not recognised as a “serious” profession. Now that it has finally come within the purview of the Indian Government so as to adapt a concrete framework for it, it reflects a change in the perspective towards the industry.

Impact on Brands

Up until now, the process was fairly smooth for brands, social media managers or management agencies would share a list of suitable influencers with the brand; the brand would approve and accordingly then send PR packages to influencers to promote. Since barter deals were very common in the industry, companies used to send products out to multiple influencers ranging from micro-influencers to big names in the industry with over 1-2 million followers. Now brands will have to prepare a curated list of influencers and content creators that they wish to partner with, and carefully vet and send their products to an exclusive list of influencers owing to requisite tax compliances, and needing to keep a track of which influencer has decided to keep which product or which one has sent it back to the brand.

In conclusion, be aware of the TDS implications and comply with the necessary regulations while engaging in any digital marketing services, gifting activities, or influencer marketing.

FAQs

Q: What is the significance of social media influencers in today’s digital landscape?

A: Social media influencers play a significant role in building online communities and promoting brands through popular social media platforms like Instagram, Facebook, YouTube, TikTok, and others. They have gained immense popularity and influence, especially during the COVID-19 pandemic, and are sought after by brands for digital brand awareness.

Q: How do social media influencers collaborate with brands for promotions?

A: Social media influencers collaborate with brands by promoting their products or services on their social media platforms. This collaboration can take various forms, including sponsored posts, product reviews, giveaways, and brand partnerships. Influencers may receive freebies or affiliate coupon codes from brands in exchange for promoting their offerings to their followers.

Q: What is a “Barter Collaboration” in the context of social media influencers?

A: A “Barter Collaboration” refers to an arrangement where social media influencers receive PR packages or free products from brands in exchange for promoting the brand’s products or services on their social media platforms. In this arrangement, no money is exchanged between the influencer and the brand.

Q: What is Section 194R of the Income Tax Act, 1961, and how does it apply to social media influencers?

A: Section 194R of the Income Tax Act, 1961 is a provision that mandates the deduction of tax on benefits or perquisites received by residents from businesses or professions. It applies to social media influencers when they receive benefits or perquisites from brands, even if those benefits are non-monetary in nature.

Q: When does Section 194R apply to social media influencers?

A: Section 194R applies to social media influencers when the total value of the benefits or perquisites they receive from a brand exceeds INR 20,000 in a financial year.

Additionally, this section applies if the benefits are received from any person [other than an individual or Hindu Undivided Family (HUF) having total sales/ receipts/ turnover of less than INR 1 crore (for businesses) or INR 50 lakhs (for professions) in a financial year.]

Q: When did the new provision regarding taxation of social media influencers come into effect?

A: The new provision regarding the taxation of social media influencers, Section 194R, was inserted in the Finance Act, 2022 and became effective from July 1, 2022.

Q: What is the impact of the new provision on social media influencers?

A: The new provision requires brands to deduct 10% tax on the value of the products provided to social media influencers as PR packages. This change ensures that influencers are taxed on the promotional benefits they receive, even if no actual payment is made to them. This may lead influencers to prefer paid partnerships over barter deals and brings the content creation industry under the purview of the Indian Government.

Q: How might the new provision change the way influencers engage with brands?

A: The new provision may lead influencers to prefer paid partnerships over barter collaborations since both types of income are now taxable. Influencers may also view this change positively as it brings the content creation industry into a recognized framework and reflects a change in the industry’s perception.

Q: How does the taxation rule affect brands working with social media influencers?

A: Brands will need to adapt to the taxation rule by preparing curated lists of influencers they wish to partner with and carefully vetting and sending products only to those influencers. Brands will also need to comply with tax regulations and keep track of which influencer keeps the products and which ones return them.

As the deadline for filing your Income Tax Returns approaches, it’s time to prepare everything you need to know about filing your ITR. The due date for filing ITR for AY 2022-2023 is July 31, 2023, if audit is not applicable and October 31, 2023, if audit is applicable. It’s essential to file your ITR on time and disclose all your incomes accurately and completely.

To ensure the accuracy and completeness of the information requested by the Income Tax Department in the applicable ITR form, you should keep all the required documents handy in advance and be ready with up-to-date information. Here are some essential things to keep in mind while filing your ITR.

New Vs. Old Tax Regime

The government introduced a new optional tax regime in Budget 2020. From FY 2020-2021 onwards, individual taxpayers can choose between two tax regimes. Under the new regime, taxpayers can offer their income to tax at a lower slab rate. However, they need to forgo various deductions and exemptions available under the old regime. Taxpayers are generally advised to choose the regime at the beginning of the year. However, if you were unable to make planned investments or expenses against which you could claim the tax deduction under the old regime, you can switch to the new regime provided it leads to lower tax liability for you. The slab rates for Assessment Year 2023-24 (AY 2023-24) are as below :

ITR Forms 

Choosing the appropriate ITR form for filing your Income Tax Returns is crucial. Failure to do so can result in your return not getting processed by the income tax department. The selection of ITR form is based on the nature of income or the category to which the taxpayer belongs. You are most likely to receive a defect notice from the department if you file an incorrect return form, which must be rectified within the specified time limit.

ITR 1 (SAHAJ)

This form is for Resident Individuals and Hindu Undivided Family (HUF) having total income up to INR 50 lakh from Salaries, One House Property, and Other Sources (Interest, Dividend, etc.).

ITR 2 

This form is for Individuals and HUFs having income from Salaries, House Properties (more than one house property), and Other Sources more than INR 50 lakhs. Individuals having Income from Capital Gains, Foreign Income/Foreign Assets also need to file this ITR Form. It is also applicable for Individuals/HUFs holding unlisted equity shares or directorship in a Company.

ITR 3 

This form is for ​Individuals or HUFs having income from ‘profits and gains of business or profession’ from a proprietary business or profession. ​​​ ITR 3 is also required to be filed by a person whose income chargeable to tax under the head “Profits and gains of business or profession” is in the nature of interest, salary, bonus, commission or remuneration, due to, or received by them from a partnership firm.

ITR 4 (SUGAM)

This form is for Resident Individuals/HUFs/Firms (Other than LLP)​ whose total income for the year includes:

(a) Business income computed as per the provisions of section 44AD or​ 44AE of the Income Tax Act, 1961; or​;

(b) Income from Profession as computed as per the provisions of​ section 44ADA of the Income Tax Act, 1961; or

(c) Income from salary/pension up to INR 50 lakhs; or

(d) Income from one house property (excluding cases where loss is brought forward from previous years); and/or sources of income, and ensure that all required information is accurately and completely disclosed in the appropriate ITR form.

ITR 5

ITR 5 is for firms, Limited Liability Partnerships (LLP), Association of Persons (AOP), (Body of Individuals (BOI), Artificial Juridical Person (AJP), Estate of deceased, Estate of insolvent, Business trust and investment fund.

ITR 6

ITR 6 is for Companies other than companies claiming exemption under section 11 (Income from property held for charitable or religious purposes). This return has to be filed electronically only.

ITR 7

ITR 7 is to be filed by persons including companies required to furnish returns under section 139(4A)/section 139(4B)/section 139(4C)/section 139(4D)/section 139(4E)/section 139(4F).

DEDUCTIONS

There are several deductions that each individual is eligible to claim in his/her ITR. It is very important to claim a deduction based on investments done during the year under Section 80C, 80CCC, and 80CCD, of the Income Tax Act, 1961. For example, interest on NSC will be first added to income from other sources and then it can be claimed for deduction under Section 80C. Similarly, Principal Repayment of Home Loan, Investments made in PPF, etc. are eligible for claiming deductions under section 80C. However, the maximum deduction available is INR 1,50,000 as mentioned in Section 80E. The assessees can also claim deduction for Premium on Mediclaim (Section 80D), Donations (Section 80G), Interest on Education Loan taken for self, spouse, children for higher studies (Section 80E), etc.

TDS and TCS details 

Tax deducted at Source (TDS) and Tax Collected at Source (TCS) should be correctly mentioned in the ITR in order to avoid any issues while processing returns. Incorrect particulars can lead to notice being issued and penalty being levied. It is important to check Form 26AS before filing the ITR. Form 26AS includes all the income details, TDS, advance tax paid by you, self-assessment tax, etc. A salaried person must cross verify the details in Form 16 issued by the employer with Form 26AS. In a case where the TDS is not reflected in Form 26AS, you will not get a credit for tax deductions that are not mentioned therein. It is the taxpayer’s obligation to make sure that the information in Form 26AS is up-to-date and correct.

OTHER IMPORTANT POINTS 

1. Clubbed income – If there is any income of a minor child or spouse that is clubbed in the hands of the taxpayer, it must be disclosed in the form.
2. Exempt income – The details about all the income earned during the previous year must be filled out in the ITR including such incomes which are exempted from tax. Exempt Income should be separately mentioned in the schedule for reporting tax-exempt income in the ITR.
3. Bank account details – it is mandatory for every assessee to mention the bank details of all the bank accounts held by them. In case of multiple bank accounts, you need to select one account in which you want to receive refunds.
4. Details of unlisted equity shares held – A taxpayer is required to mention details of unlisted equity shares held by him/her. Details such as name and Permanent Account Number (PAN) of the company, number of shares acquired and sold during the year.
5. Schedule of assets and liabilities – Individual taxpayers who have net taxable income of more than Rs 50 lakh in a financial year are required to report details of specified assets such as land, building, movable assets, bank accounts, shares & bonds and the corresponding liabilities against those assets if any. This disclosure is to be made in Schedule AL (Assets and Liabilities).
6. Profit on sale of jewellery, paintings and more – The items such as jewellery, archaeological collections, sculptures, drawings, paintings are counted as capital assets by the Income Tax Department. So, any capital gain from selling such items must be mentioned in the ITR.

Filing an Income Tax Return can be a daunting task, but with proper planning, organization, and knowledge of the relevant rules and regulations, it can be completed smoothly and successfully. So, as the deadline for filing Income Tax Returns approaches, make sure to gather all the necessary documents and information, select the appropriate ITR form, and file your return with complete and accurate disclosure of all incomes and deductions.

FAQs about ITR

Sure, here are 5 frequently asked questions (FAQs) about filing Income Tax Returns (ITR):

1. When is the deadline to file ITR for Assessment Year (AY) 2023-24?

The deadline to file ITR for the financial year 2022-2023 (AY 2023-24) is July 31, 2023, for individuals and non-audit cases. However, for businesses and entities that require audit, the deadline is October 31, 2023.

2. Do I need to file ITR if my income is below the taxable limit?

If your total income is below the taxable limit of Rs. 2.5 lakh, then you are not required to file ITR. It’s important to note that even if your income is below the taxable limit, there may be circumstances where filing an ITR voluntarily can be beneficial. For example:

1. Claiming a refund: If you have paid taxes deducted at source (TDS) or advance tax, you can file an ITR to claim a refund of the excess tax paid.
2. Establishing financial records: Filing an ITR can help establish a record of your income and financial activities, which may be useful for various purposes like loan applications, visa processing, or applying for government schemes.
3. Carrying forward losses: If you have incurred a loss in a particular financial year, filing an ITR can enable you to carry forward those losses for set-off against future taxable income.

It’s always advisable to consult with a qualified tax professional or refer to the latest guidelines issued by the Income Tax Department of India to ensure compliance with the applicable tax laws.

3. What are the documents required to file ITR?

The documents required to file ITR include your

• PAN card,
• Form 16/16A,
•  salary slips,
• bank statements,
• investment proofs,
• and any other relevant document related to your income or tax deductions like PPF, Home loan documents, LIC , Mediclaim , etc..

4. Can I file ITR online?

Yes, you can file ITR online through the Income Tax Department’s e-filing portal. You need to register on the portal using your PAN.

5. What are the consequences of not filing ITR?

If you are liable to file an ITR and fail to do so, you may be subject to penalties and interest charges. The penalty can range from a minimum of Rs. 5,000 up to Rs. 10,000, depending on the time and circumstances of non-compliance. Additionally, interest may be levied on any unpaid taxes. Further, filing an ITR allows you to claim any tax refunds due to you. By not filing, you forfeit the opportunity to receive any refunds for excess tax paid.

The Budget 2020 has brought a unique concern to the taxpayers through announcement of a new tax regime. It offers more tax slabs and lower tax rates. This was long demanded by most taxpayers, but it came with the catch of removal of all the deductions and exemptions available.

To add to this confusion, the finance minister gave taxpayers a choice between the new regime and existing one, leaving it to the citizens to decide on the basis of their preference. Instead of providing simplicity, understanding the tax regime in India may have become more complex.

Let us understand the new tax regime and what does it bring as a package.

Applicability:

The New tax regime is applicable to resident Individuals and HUF (“Hindu Undivided Family”), from the Financial Year 2020-21.

Proposed Tax Rates:

Health and Education Cess and Surcharge provision remains the same irrespective of the option chosen.

Point to Choose:

Tax payers can either choose to continue with existing tax system or select the new tax regime.

What benefit does it offer?

There are various benefits to this, some of them listed below:

• It provides an opportunity to increase the take home salary to the taxpayers;
• No need to worry about investments/deductions every year;
• Reduced compliances/paperwork as deductions/exemptions are not available;
• Easy and Self-competent payment of taxes and filing of returns;
• A good scheme for small taxpayers for a moderate class income range

What is there to lose:

Under this scheme, there is a list of exemptions/ deductions that have been withdrawn. Here is the list of exemptions/deductions not available anymore – Click.

Currently, under the old regime, the exemptions/ deductions allow you to lower your tax amount by investing, saving, or spending on specific items. However, it also means every year you have to find ways to optimize your salary and savings/investments so as to keep your taxable income to the minimum.

The Choice:

So basically, every person will have his own unique New Tax Slab Vs Old Tax Slab calculations as the deductions claimed by the person may be unique to him. Each individual tax payer ideally has to do their own calculations and depending on the amount of deductions/ exemptions being claimed, it is better to pick the better one between the two.

Here are steps you can follow:

• Ascertain your income under each head;
• Determine your exemptions/ deductions;
• Calculate the tax liability using the tax calculator given below;
• Decide where do you pay less

Tax Calculator:

We have created a simple tax calculator which will help you to determine your tax liability under both the tax regime considering the steps above.

You can access the calculator here – Download Tax Calculator

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