The Indian startup ecosystem is raising its collective voice ahead of the Union Budget, calling for crucial reforms in two key areas: employee stock ownership plans (ESOPs) and funding for deep technology sectors. Industry leaders and advisors are highlighting the absence of clear guidelines on ESOP taxation and the need for stronger financial support for innovation in artificial intelligence and other frontier technologies.
The Persistent ESOP Taxation Puzzle
One of the most pressing demands revolves around providing clarity and relief on the taxation of Employee Stock Ownership Plans. Currently, the landscape lacks proper, streamlined guidelines, creating uncertainty for both companies and their employees. This issue directly impacts the ability of startups, which often use ESOPs as a key tool to attract and retain top talent in lieu of high cash salaries, to build strong teams.
Professional services firm Deloitte has formally included this point in its pre-budget recommendations. It pointed out that under Section 17(2) of the Income Tax Act, ESOPs are currently taxed as perquisites at the time of exercise. This means employees are liable to pay tax when they buy the shares, not when they eventually sell them and realize actual capital gains. This timing mismatch can lead to a significant cash flow burden for employees, especially if the company is not yet publicly listed and the shares are illiquid.
A Call for Deep Tech and AI Investment
Parallel to the ESOP clarifications, the startup community is advocating for a substantial enhancement in funding and policy support for deep tech and artificial intelligence ventures. These sectors, which include areas like advanced biotechnology, quantum computing, and sophisticated AI models, require substantial capital, longer gestation periods, and specialized infrastructure. Stakeholders argue that targeted funding mechanisms, research grants, and public-private partnerships are essential for India to secure a competitive edge in these strategic fields of the future.
The combined push indicates a maturation of the startup industry's engagement with policy. The focus is shifting from generic benefits to nuanced, sector-specific interventions that address operational hurdles like ESOP taxation and strategic national priorities like leadership in deep tech innovation.
Looking Ahead to Budget Day
As the government finalizes its budget proposals for the fiscal year, all eyes are on whether these specific requests will be addressed. Providing ESOP clarity could unleash greater employee participation and loyalty in the startup workforce. Simultaneously, a committed push towards deep tech and AI funding could catalyze the next wave of high-impact, intellectual property-driven companies from India. The outcome will signal the government's continued commitment to nurturing a knowledge-based, innovation-led economy.
The news was last updated on 11 January 2026, at 21:56 IST, as reported by business outlets.
