Startups seek ESOP clarity, enhanced funding for deep tech, AI

Ahead of the Union Budget 2026, the country's startup ecosystem is expecting policymakers to address various challenges, including clarity on ESOP (Employee Stock Option Plan) taxation and enhanced funding in deep tech, Artificial Intelligence (AI), data and cybersecurity startups.

Currently, there are no proper guidelines when it comes to ESOPs. Deloitte in its Budget expectations said that under Section 17(2) of the Income Tax Act, ESOPs are taxed as perquisites at the time of exercise. "While this framework works for domestic employees, it does not address specific concerns for cross-border employees, particularly those who have rendered services both in India and abroad during the grant-to-vesting period," it said, adding that it leads to hardship for mobile employees, including expatriates and returning Indians.

It recommended that CBDT (Central Board of Direct Taxes) should issue clear guidelines for apportioning ESOP taxation in cross-border scenarios, including a standard formula or method based on the location of services rendered during the grant-to-vesting period to determine the perquisite, as well as the cost of acquisition.

Founder HCL and Chairman EPIC Foundation Ajai Chowdhry said India stands at a critical juncture in its journey to become a global innovation hub, and the ESOPs framework of a country plays a critical role in supporting the growth of the startup ecosystem. He opined that in sharp contrast to other mature startup ecosystems, India's dual taxation model on ESOPs — taxing employees at exercise and again at sale — creates significant friction that is actively pushing Indian startups and founders toward offshore relocation. "I am hoping to see a simplified ESOP taxation for startups during this budget that will be critical for the country's growing startup ecosystem," he added.

"Government procurement is the strongest catalyst for startup growth. India's Rs 37 lakh crore annual government spend reaches less than 1% of innovative startups. By engaging with 400-plus startups and with 74 active projects with the Indian Army alone, IDEX has demonstrated that structured government procurement-plus-funding can scale startups 10x faster. Other ministries operate fragmented schemes without direct startup engagement. A Cross-Ministry Startup Procurement Framework is urgently needed to unlock promising ventures serving critical national demands," Chowdhry added.

In last year's Budget, Union Finance Minister Nirmala Sitharaman announced that the Alternate Investment Funds (AIFs) will be supported by the Rs 10,000-crore commitment. Sitharaman also announced that a deep tech Fund of Funds will be explored to catalyse the next-generation startups.

Startups expect the government to enhance funding in deep tech in the upcoming Budget. Wissen Technology CEO & Founder Raghu Pareddy said an understanding to enhance funding for deep tech, AI, data, and cybersecurity startups, rationalised tax and ESOP reforms, and simplified compliance will be the key to enabling sustainable growth.

Airbound Founder & CEO Naman Pushp said Budget 2026 should prioritise two things very clearly. First, sustained R&D funding for hard problem statements. "Deep-tech R&D is expensive, uncertain, and long-cycle, which is why many companies end up copying foreign designs or outsourcing critical innovation. Second, capex support for advanced manufacturing, including the cost of machinery, training, and build-out, because hardware innovation cannot scale without serious upfront investment. If India wants to truly own categories like flight-based logistics, we need to invest in both end-to-end, in R&D and final-stage manufacturing," he said.

Grant Thornton Bharat Partner Raja Lahiri said India’s innovation economy is entering an execution phase, and Budget 2026 will be judged on how quickly it converts intent into infrastructure. "Founders are buzzing about practical enablers: streamlined tax regimes with simplified TDS slabs to ease compliance drag. There’s strong expectations for accelerating AI adoption through sovereign compute infrastructure and talent incentives, unlocking India’s projected $1.7 trillion AI-driven economic boost by 2035. Market signals echo this tech and ease-of-doing-business reforms are seen as top growth levers, with calls for customs duty waivers on GPUs (Graphics Processing Unit), accelerated depreciation for data-centre assets, and renewable-energy-linked incentives," he said, adding that if these measures align with IndiaAI and fast-track RDI deployment, the country can shift from promise to global product leadership.