Post Incorporation Compliances Under Companies Act, 2013 [CS Hera Siddiqui]



The Companies Act 2013 consolidates and amends the law relating to companies and leaves no room for any mistake. Every newly incorporated Company or a Company which has been incorporated in India need to ensure compliance with Companies Act, 2013. One who is unaware of law may not escape liability for violating the law. Thus the statutory post /annual compliance(s) of Company are as follows:

COMPLIANCE

WHEN TO BE DONE/DUE DATE

Bank account Open

Within 30 days of Incorporation.

Note: Now w.e.f. 23rd February, 2020 all new companies incorporated through SPICE+ would mandatory require opening company’s Bank Account through the AGILE-PRO linked web form.

Appointment of Auditor (E-form ADT-1)  (Section 139 (6))

 

*First Statutory Auditor has to be appointed within 30 days of incorporation in first board meeting and shall hold office until the conclusion of first AGM (Annual General Meeting). Note:  If somehow Board failed to appoint auditor within 30 days, the members shall appoint the auditor within 90 days at an Extra Ordinary General Meeting (EGM)

*Subsequent auditors will be appointed for 5 years in AGM.

Declaration for Commencement of Business (Form INC-20A)

 

Every company before starting its business or exercising its borrowing powers must file form INC-20 A for the declaration of commencement of business. This form is to be filed within 180 days from the date of incorporation of the company. Note: 1. An additional 180 more days has been allowed under Companies Fresh Start Scheme, 2020. 2. Late filing fees levied by MCA, if a form is not filed within the time prescribed 3. A Penalty of Rs.50,000/- to the company 4. A Penalty of Rs.1000/- per day to the director MCA may remove the name of the company from the register of companies if not any company complied with this compliance. Attachments: Subscriber Proof of Payment for value of Shares

Form MBP- 1  As per Section 184 (1) Every Director of the Company in First Meeting of the Board of Director in each Financial Year needs to disclose his interest in other entities by filing the form

Fresh MBP-1 needs to be filed, whenever there is change in his interest from the earlier given MBP-1

Form DIR – 8 (Section 164 (2))

Every Director of the Company in each Financial Year has to file with the Company disclosure of non-disqualification

Issuance of Share Certificate

Every newly incorporated Company within 60 days of Incorporation issue the Share Certificate to the Shareholders of the Company. Note: In case any point of time if Company allot any additional shares than within 60 days from the date of allotment share certificate need to be issued to shareholders.

Directors’ Report

Directors’ Report is to be filed covering all the information required for Company under Section 134.

Annual General Meeting

It is mandatory for every Private/Public Limited Company to hold an AGM in every Calendar Year. Companies are required to hold their AGM within a period of six months, from the date of closing of the Financial Year. Note: Newly Incorporated Company can hold their first AGM within 09 months from the date of closing of Financial Year.

E-form: AOC-4

File Financial Statement within 30 days of AGM. Main Attachments:

1. Balance Sheet along with Statement of Profit and Loss Account and Directors’ Report

2. Copy of Financial Statement

3.Secretarial Audit Report (in case it was applicable)

E-FORM MGT-14 

Within 30 days of approval of Director’s Report and Financial Statement every Public Company required to file this form to ROC

E-form: MGT-7

File Annual Return within 60 days of AGM for the period 1st April to 31st March. Main Attachment: List of shareholder

Board Meeting Minutes

First meeting of the Board of Directors of a Private/Public Limited Company shall be conducted within 30 days from the date of Incorporation of company. Further, minimum Four Board Meetings shall be held in a calendar year (one meeting in every 3 months).

Regularization of Directors (Form Dir-12)

Every Additional Director Need to be regularized as director within 30 days from the date of AGM

Regularization of Auditor (Form ADT-1)

Auditor need to be regularized within 15 days from the date of AGM


OTHER ANNUAL COMPLIANCES

COMPLIANCE

DUE DATE

E-FORM DIR-3 KYC

Every Individual who has been allotted a Director Identification Number (DIN) on or before 31st March need to submit the form to Central Government on or before September 30 of immediately next Financial Year. Note: If someone have already filed the form but are willing to make changes in the information are required to fill the fresh form again with updated details in the current year. Penalty: After due date a penalty of Rs. 5000 shall be payable. Attachments:

1.  Proof of Permanent Address

 2.  Copy of Aadhaar Card (Optional)

 3. Copy of Passport (Optional)

 4. Copy of PAN

5. Proof of Present Address (if permanent and present address is different)

E-FORM DIR-3 KYC  WEB

Any individual who has already submitted the e-form DIR-3 KYC and who does not want to update in their KYC can file annual KYC by accessing DIR-3 KYC Web service. Penalty: After due date a fee of Rs. 5000 shall be payable. Attachment: U only need OTP of Mobile Number and E-mail id. No other documents are required

E- FORM DPT-3

Every Company other than Government Company shall be required to file this form on or before June 30 of every year with Registrar whose return of deposit or particulars of transaction or both not considered as deposit. Attachment :

 1. Auditor’s Certificate (Mandatory)

2. Copy of Trust Deed (Mandatory if Company has trust deed)

3. Copy of instrument creating charge (Mandatory if mentioned in form)

4.  List of Depositors (Mandatory if Company has balance of deposits outstanding at the end of the year)

E-FORM BEN-2

On receipt of declaration of BEN-1 every Company shall file a return in BEN-2 with Registrar within 30 days from the date of receipt of such declaration. Attachment: Declaration from SBO (Significant Beneficial Owner) in Form BEN-1 from each shareholder having 10% or more shares of voting rights

STATUTORY REGISTER TO BE MAINTAINED AT REGISTERED OFFICE UNDER COMPANIES ACT, 2013

 

 

1. Register of Deposit

2. Register of Director/KMP

 3. Register of Transfer

4. Register of Related Party Transaction 5.  MGT-1- Register of Member

 6. MGT-2- Debenture Holder

7. MBP-2- Register of Loan & Guarantee

 8. MBP-3- Register of Investment of Company not held in its own name

9. CHG-7 – Register of Charges

10. SH-2 – Register of Renewed & Duplicate Share Certificate

11. SH-3 – Register of Sweat Equity Shares

12. SH-6 – Register of Employee Stock Option 13. SH-10- Register of Shares/Other Securities Bought Back.

14. Register of Contract & Arrangements in which directors are interested etc.


DIFFERENT STATUTORY COMPLIANCES FOR A NEWLY INCORPORATED COMPANY

A. GST

1. GST Registration for New Business

The Goods and Services Tax, right from its implementation on the 1st of July, 2017, has been the talk of a Nation striving towards fulfilled development.  In this article, we look at the procedure for obtaining GST registration for new business. This post is particularly for our budding entrepreneurs, and of course anyone willing to learn.

The basic requisite for a Business to have GST registration is that the turnover must be more than 20 lakhs, 10 lakhs for “Special category states”, except for the state of Jammu and Kashmir where registration is not required. We have a few exceptions though, which is listed and explained below;

2- GST Registration For Service Providers

Service providers in India, those involved in interstate or intra-state state supply of goods and whose turnover is within 20 lakhs, are exempted from registration. The decision was taken in the 23rd GST council meeting, which amends the earlier dictum where inter-state suppliers had to register for GST and file returns, irrespective of the amount of turnover.

3- Casual Taxable Person

casual taxable person is anyone who occasionally undertakes transactions involving supply of goods and/or services, in a state or territory where he has no fixed place of business. He/she is taxable irrespective of the turnover of their business.  These type of taxpayers are not eligible for composition levy. The concerned person has to apply for registration at least 5 days before the commencement of business. He/She must make an advance deposit of tax to the extent he is liable. He can continue with the supplies of his services after getting a certificate of registration.

4- Non-Resident Taxable Person

Non-Resident taxable person is any person who partakes in receiving and supply of goods, but has no permanent business or residence in the country. Similar to a Casual Taxable person, there is no turnover limit. Unlike other taxpayers, a non-registered person is not required to submit his pan number, but should provide his tax identification number or unique identification number, which can be used to verify his identity. He/She must make his registration five days before his commencement of business and must pay the required advance amount for which the concerned person is liable…… Point to be noted, a non-registered tax person should not apply in a normal application form, but in another simplified version called form GST-REG-09.

He/She is responsible to electronically submit the application, along with an attested passport. He can do it either through the common portal or through a facilitated center notified by the commissioner. A non-registered person, if willing to extend his registration, can also do it through an application in FORM GST REG-11.  A non-taxable person can start with his operations immediately after issuing the certificate of registration. The refund of advance tax paid by a non-taxable person will only be returned after filing of all the returns for the period of registration.

5- Reverse-Charge Mechanism:-

It is mandatory for a person undertaking reverse charge transactions to register for GST. Reverse-charge mechanism is a provision where the liability of tax is on the receiver of goods, and not the supplier. This is done on specific imports and other notified supplies.

6- Other Criteria’s

  • Any person who has registered in any of the previous tax systems like Excise duty, Service tax or VAT must register for GST.

  • In case of a transfer of a business from one person to another, the person to whom the rights are transferred to must register for GST

  • Agents of a supplier .

  • E-Commerce operator.

  • Any person who supplies via an E-Commerce operator

  • Any person supplying specific information from anywhere outside India, to a Non-Registered Indian citizen.

7- GST Registration For Multiple Branches

If your planning to start a new business and open multiple branches, then separate GST registrations has to be obtained from each state and each branch. In case of different verticals in business, separate registration has to be obtained for each vertical.

8- Documents Required For Registration

The following are the documents required for GST registration in India:

  • Aadhar card of all Directors

  • PAN card of all the Directors

  • Valid Indian mobile number

  • Valid E-Mail address

  • Prescribed documents

  • Business Address proof

    • a. If business place is rental, Rental agreement / Lease agreement

      b. NOC from the Landlord / Owner (even if the place is one of the Directors’)

  • Recent Electricity Bill

  • OR Property Tax receipt

  • An authorized signatory who is a resident of India and who has a valid PAN number and other necessary details

  • At least one proprietor/Partner/Kartha/Trustee/Member with valid PAN

  • Valid Indian bank account

  • Indian financial system code (IFSC) number of the bank

  • Jurisdiction details

  • Company PAN number

  • Incorporation Certificate

  • Memorandum of Association (MoA)

B. TRADEMARK

Trademarks:

Popularly known word “Brand Name” is referred as “Trademark” in legal terms. A Trademark means any symbol, word, name, device, numerals or combination of both, which can be represented graphically can be registered as trademark. A trademark is unique symbol which distinguishes your goods or services from others. The trademark which is registered for services are known as the service marks.

A Good Trademark shall be easy to speak and remember, despite of it should not lose its uniqueness and distinctive character. Decision of a consumer approaching for purchasing any goods or hiring services are highly influenced by the Brand Value and reputation a Brand Name holds.

Any entrepreneur should be aware of what benefits, Trademark Registration offers. Here are Top 10 benefits explained in this blog:

Advantages of Trademark Registration:

1. Exclusive Rights: 

The owner of Registered Trademark enjoys exclusive right over the trademark. The owner can use the same for all the products falling under the class(es) applied. Further, the owner can enjoy the sole ownership of the Trademark and can stop other from the unauthorised use of the Trademark under the same class where it is registered. It gives the right to sue the unauthorized user of the Trademark Registered.

2. Builds trust and Goodwill: 

The established quality of your product and services are known by everyone through the trademark and which establishes trust and goodwill among the customers in market. It helps in creating permanent customers who are loyal and always opt for the same brand.

3. Differentiates Product: 

It makes easy for customers to find your products. It makes your product and identity of products different from that of the existing and foreseen competitors and acts as efficient commercial tool. The logo can communicate your vision, quality or unique characteristic of your company and any organisation.

4. Recognition to product’s Quality: 

It gives recognition to the quality of the product. Customers attach the product’s quality with the brand name and this image is created in the market about the quality of a particular brand which helps in attracting new customers as they can differentiate the quality of a product by the logo/brand name.

5. Creation of Asset: 

Registration of Trademark creates an intangible asset i.e. Intellectual Property for an organisation. Registered trademark is a right created which can be sold, assigned, franchised or commercially contracted. Also, the Trademark is an intangible asset which gives the advantage to the organisation.

6. Use of ® symbol: 

Once the trademark is registered you can use the ® symbol on your logo stating that it is a registered trademark and no one can use the same trademark. It is exclusive of all types of usages as well as rights. If someone else use the trademark then you can also sue the party if the trademark is registered.

7. Protection against infringement: 

No competitor or other person can use the wordmark or logo registered by you under trademark. However, if in any case one uses it without the approval of the owner of trademark or make any deceptive use of same, the owner can get the legal protection under the Act and stop the person doing so.

8. Protection for 10 Years at low cost: 

Online Trademark registration is done on a very low maintainability cost. Once you register the trademark you have to just pay the maintenance cost and renewal cost which is after 10 years of registering the trademark. It is cost efficient and helps your company create an unique image.

9. Global Trademark Registration: 

If one wants to register the trademark in countries other than India, the trademark registered in India can be used as basis of registration there. For any person willing to expand outside India, the trademark registered in India can provide a good base along with the Established Goodwill in the Country.

10. Attract Human Resources: 

Young minds aspire to join big Brands as it acts as a magnate. It inspires the positive image of the organisation and thus candidates are attracted towards them easily. This reduces the cost towards hiring and related activities.

Documents required for Trademark Registration- he case of a partnership firm or LLP, the entrepreneur would have to submit the following:

  • Copy of Logo (Optional)

  • Signed Form-48.

  • Udyog Aadhar Registration Certificate.

  • Incorporation Certificate or Partnership Deed.

  • Identity Proof of Signatory.

  • Address Proof of Signatory.

C. PF

Employees Provident Fund (EPF) is a scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. It is regulated under the purview of the Employees’ Provident Fund Organisation (EPFO) which is one of the world’s largest social security organizations in terms of clientele and the volume of financial transactions undertaken. Basically, EPF is like a benefit to an employee during the retirement provided by the organization.

Applicability of EPF Registration for Employers

EPF registration is mandatory for all establishments-

  • which is a factory engaged in any industry having 20 or more persons, and

  • to any other establishment employing 20 or more persons or class of such establishments which the Central Government may, by notification specify on this behalf.

The employer must obtain the registration within one month of attaining the strength, failing which penalties will be applicable. A registered establishment continues to be under the purview of the Act even if the employee strength falls below the required minimum.

Central Government may apply the provisions to any establishment employing less than 20 employees after giving not less than two months’ notice for compulsory registration. Where the employer and majority of employees have agreed that the provisions of this act should be made applicable to the establishment, they may themselves apply to the Central Provident Fund (PF) Commissioner.

The Central PF Commissioner may apply the provisions of this Act to that establishment after passing the notification in the Official Gazette from the date of such agreement or from any subsequent date specified in the agreement.

All the employees will be eligible for a PF from the commencement of their employment and the responsibility of deduction & payment of PF lies with the employer. The PF contribution of 12% should be divided equally between the employer and employee. The employer’s contribution is 12% of the basic salary. If the establishment has employed less than 20 employees, the PF deduction rate will be 10%.

EPF Registration Procedure Online

The employer must register the establishment online. With the convenience of online registration the employer can register the establishment by providing the following details:

Establishment details

  1. The establishment details to be provided are the Name of the establishment, Address, Incorporation Date, PAN and Type of establishment.

  2. If the establishment is a factory then the details to be provided are the Factory License Number, Date of License and Place of issue of License.

  3. If the establishment is an MSME then MSME registration details to be provided.

  4. If the establishment is registered under Startup India, then the Startup India registration details are to be provided.

EContacts

The employer must provide email id and mobile number of the authorised person.

Contact Person

Employers must provide details of the contact person like a manager. The details required are: Name, Date of Birth, Gender PAN, Designation date of joining and address details.

Identifiers

The identifiers are the license information that the employer needs to provide.

Employment details

The employment details required to be provided are the Employee strength, Gender, Type of activities, Wages above limit and Total wages.

Branch/Division

Branch details such as name/premise number, LIN (Labour Identification Number) and address.

Activities

The employer needs to enter the NIC Code (National Industrial Classification) and select the nature of business and the activities included from the drop down lists available.

Documents Required For EPF Registration

The following documents need to be attached to the “Registration Form for EPFO” by the employer- 

  1. PAN Card of the Proprietor/Partner/Director.

  2. Proof of address such as the Electricity Bill or Water Bill or Telephone Bill of the Registered Office (not older than 2 months).

  3. Aadhar Card of Proprietor/Partner/Director.

  4. Shop and establishment Certificate/GST Certificate/ any License issued by the government for the establishment.

  5. Digital Signature of the Proprietor/Partner/Director.

  6. Cancelled Cheque or Bank Statement of Entity.

  7. Hired/Rented/Leased Agreement, if any.

  8. License Proof issued by the Identifier/Licensing Authority.

D. ESI

ESI stands for Employee State Insurance managed by the Employee State Insurance Corporation (ESIC) which is an autonomous body created by the law under the Ministry of Labour and Employment, Government of India.

The ESI scheme was started for Indian workers. The workers are provided with a huge variety of medical, monetary and other benefits under the ESI Act from the contributions made by both the employer and employee towards the ESI scheme.

ESIC Registration Eligibility

Any non-seasonal factory or establishment having more than 10 employees (in some states it is 20 employees) who have a maximum salary of Rs. 21,000/- has to mandatorily register itself with the ESIC within 15 days from the date of its applicability.

Under this scheme, the employer needs to contribute an amount of 3.25% of the total monthly salary payable to the employee whereas the employee needs to contribute only 0.75% of his monthly salary every month of the year. The only exemption to the employee in paying his contribution is whose salary is less than Rs. 176/- per day.

Entities Covered Under ESIC

As per the government notification, under Section 1(5) of the ESI Act the following entities are covered:

  1. Shops.

  2. Restaurants or hotels engaged only in sales.

  3. Cinemas
  4. Road motor transport establishments.

  5. Newspaper establishments (which is not covered under the Factory Act).

  6. Private medical institutions.

  7. Private educational institutions.

Documents Required for ESIC Registration

Since the procedure for registration is online, no physical documents are required to be submitted. The documents required while filling the online registration form are:

1- Registration Certificate obtained either under the:

Factories Act, or

Shops and Establishment Act.

2- Certificate of incorporation of the establishment, which are as follows:

Certificate of Company Registration in case of a company.

Partnership deed in case of a partnership firm.

GST certificate of the establishment.

3- Memorandum of Association and Articles of Association of the company.

4- Address proof of the establishment.

Any one of the following can be submitted as address proof:

Utility bills (Electricity bill, gas connection bill or telephone bill of the establishment not exceeding three months)

Rental agreement of the land on which the establishment is situated

Property tax receipts of the land on which the establishment is situated

5- A list of all the employees working in the establishment.

6- PAN Card of the business establishment as well as all the employees working in the establishment.

7- The compensation details of all the employees.

8- A cancelled cheque of the bank account of the company.

9- List of directors of the company.

10- List of the shareholders of the company.

11- A register containing the attendance of the employees.

Benefits of ESIC Registration

The benefits of registering under this scheme are varied. Some of them are:

  1. Sickness benefits at the rate of 70% (in the form of salary), in case of any certified illness and which lasts for a maximum of 91 days in any year.

  2. Medical benefits to an employee and his family members.

  3. Maternity benefit to the women who are pregnant (paid leaves).

  4. If the death of the employee happens while on work – 90% of the salary is given to his dependents in the form of a monthly payment after the death of the employee.

  5. Same as above in case of disability of the employee.

  6. Funeral expenses.

  7. Old age medical care expenses.

Compliances After ESIC Registration

The establishment needs to comply with the following after registering under the ESIC:

  1. Maintaining the attendance register.

  2. Maintaining a complete register of wages for workers.

  3. Inspection book.

  4. Monthly return and challan within 15th of the succeeding month.

  5. Maintaining a register that records any accidents that happened on the premises.

Returns To Be Filed After ESIC Registration

After the registration under the ESIC, the employers have to file ESI Returns half-yearly. The following documents are required for the filing of the returns:

  1. Register of attendance of the employees.

  2. Form 6 – Register.

  3. Register of wages.

  4. Register of any accidents which have happened on the premises of the business.

  5. Monthly returns and challans.

E. STARTUP

BENEFITS OF STARTUP REGISTRATION

1. IPR

a) Fast tracking of start-up patent applications

b) Panel of facilitators to assist in IP applications- 902 facilitators

c) Rebate on filing of applications- 80% rebate

2. RELAXATION IN PUBLIC PROCUREMENT NORMS

Startups are entitled to avail exemption on:

a) Prior Turnover

b) Prior experience

c) Earnest money deposit

3. Self certification under Labor and Environmental Laws

a) To reduce the regulatory burden on startups, thereby allowing them to focus on their core business and keep compliance costs low.

b) Startups are allowed to self-certify their compliance under 6 Labor and 3 Environment Laws for a period of 3 to 5 years from the date of incorporation.

c) In respect of 3 Environment Laws, units operating under 36 white category industries do not require clearance under 3 Environment related Acts for 3 years

4. Faster exits for Startups

MCA has notified startups as “FAST TRACK FIRMS” enabling them to wind up operations within 90 days (180 days for other companies). Startups with simple debt structures may be wound up within a period of 90 days from making an application for winding up on a fast track basis.

5. Tax exemptions for 3 years

The recognized startups that are granted an Inter-Ministrial Board Certificate are exempted from Income-tax for a period of 3 consecutive years out of 10 years since incorporation.

a) 3 year tax holiday in a block of seven years

The Startup incorporated between April 1, 2016, till 31st March 2021 was eligible for this scheme. Budget 2021 has extended the eligibility to 31s March 2022. Such startups will be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs.25 crores in any financial year. This will help the startups to meet their working capital requirements during their initial years of operation.

b) Exemption from tax on Long Term capital Gains

A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.

c) Tax exemption on investments above the fair market value

The government has exempted the tax being levied on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investment made by incubators above fair market value is exempt.

d) Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB.

The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.

Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition.

The startups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.

This exemption will boost the investment in eligible startups and will promote their growth and expansion.

e) Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern.

The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward. The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.

6. Exemption for the purpose of clause (VIIB) of sub section (2) of section 56 of the Act

A recognized startup is eligible for exemptions from the provisions of section 56 (2) (viib) of the Income Tax Act.

Angel tax under section 56(2)(viib) of the Act is applicable to moneys received against equity shares issued by a start-up private limited company and issue price is in excess of fair market value. However, exemption available from angel tax to a DPIIT-recognized start-up private limited company applies where aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees.

7. Revamping the incorporation process

Government of India has revamped the incorporation process wherein the number of procedures to incorporate a company in India has reduced to 3 as against 10 days earlier.

8. Deferring TDS or tax payment in respect of income pertaining to Employee Stock Option Plan (ESOP) of startups

The newly introduced deference of tax payment on ESOPs will help start-ups attract and retain high-quality employees. In order to ease the burden of taxes by the employees of the eligible start-ups or TDS by the startup employer. TDS or tax payment has been deferred by 5 years or till the employee leave the company or sell their shares, whichever is earlier.

Start-ups should mention tax implications to all new employees before giving them an option to get ESOPs as there will be considerable tax consequences for an employee.

There are many employees or individuals who wanted to become a part of a start-up but are not aware of the implications of tax.

Treatment of tax depends upon various factors such as:

  1. Type of option issued

  2. Event on which such option is granted or exercised

  3. The time of resigning

ESOPs are taxed at 2 instances in the hands of employee –

  1. at the time of exercise – as a perquisite.

  2. at the time of sale by an employee – as a capital gain

Exercise price  FMV on exercise date sale price

At the time of exercise – as a perquisite- when shares are allotted to the employee after he has exercised his option on completion of the vesting period

– When the employee has exercised the option — the difference between the FMV on exercise date and exercise price is taxed as perquisite employees as per Section 17 of the Income Tax Act, 1961.

– The employer (i.e., Start-up) is liable to deduct TDS on this perquisite depending on the tax bracket in which the employee falls, and deposit the same with the government before the 7th of the next month.

– This amount is shown in the employee’s Form 16 and included as part of the total income of Salary in the tax return.

At the times of sale by an employee – as a capital gain when the employee opts to sell the allotted shares under the ESOP. 

-When an employee sells his ‘exercised shares,’ he will have to pay capital gains tax on the profit that he makes from the share sale.

-The difference between the sale price and FMV on the exercise date is taxed as capital Gain.

Here capital gain would be the difference between sale consideration and cost of acquisition. Where “Cost of acquisition” would be a perquisite value plus amount actually paid by the employee.

Capital gains are of two types:

  • Short Term Capital Gain (STCG)
  • Long Term Capital Gain (LTCG)

Tax implication on STCG: STCG arises when shares are sold within 24 months of exercising

Now, the tax liability arises within 14 days from any of the following events, whichever is the earliest:

  1. After the expiry of 48 months from the end of the relevant assessment year; or

  2. From the date of the sale of such ESOP shares by the assessee; or

  3. from the date of the taxpayer ceases to be an employee of the ESOP allotting employer.

9. Fund of funds or startups

To provide equity funding support for development and growth of innovation driven enterprises, the government has set aside a corpus fund of INR 10,000 CR managed by SIDBI. The fund is in the nature of fund of funds, which means that the government participates in the capital of SEBI registered Venture Funds, who invest twice the amount in startups.

10. Seed Fund scheme

This scheme aims to provide financial assistance to start ups for proof of concept, market entry and commercialization. This would enable these startups to graduate to a level where they will be able to raise investments from angel investors or venture capitalists or seek loans from commercial banks or financial institutions. The seed fund will be disbursed to eligible startups through eligible incubators across India.

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