Indian-American entrepreneur Chinmay Singh has criticised India’s employee stock option (ESOP) taxation rules, arguing that they prevent startups from creating wealth for talented team members.
In a post on X, Singh, who is based in San Francisco and founded the startup iWish, said he employed software engineers from small towns and villages across Uttar Pradesh, Bihar and Assam while running his US-based company. However, he is unable to give them equity.
“I ran a US based startup. My engineering team was in India. Not in Bangalore or Delhi, but scattered across small towns and villages around UP/Bihar/Assam,” he explained.
Building a team in India
While cities like Bengaluru and Gurgaon are acknowledged tech hubs in India, Singh wanted his team built differently.
The entrepreneur said that he deliberately recruited engineers from non-traditional backgrounds and paid them salaries comparable to those earned by engineers in Bengaluru.
“They were some of the best engineers I have worked with anywhere. The only thing they lacked was the ability to speak English like someone who went to a Delhi private school,” he wrote.
“I go find them. And I pay them exactly what an English-speaking engineer in Bangalore would get, without making them move. Same code, same salary. English fluency was never the skill I was hiring for.”
He added that he wanted to offer these employees ownership stakes in the company, similar to benefits enjoyed by startup workers in the United States. However, he has been unable to do so because of India’s tax rules.
Why equity became a problem
In his post titled “How babus harm Indian engineers,” he said: “Now I wanted to give them what my US team members had: ownership. A real piece of what they were building.
“For a young dude from a village in Gonda or Chapra, that can be generational, life-changing money when we exit. But I couldn’t,” Singh wrote in his X post.
The entrepreneur explained that India’s tax rules make it difficult for startup employees to benefit from company shares.
According to him, employees can be required to pay tax when they convert their stock options into shares, even if they have not sold those shares or earned any money from them.
“The moment an Indian employee exercise their options (convert them to shares), without selling anything they get taxed on the paper gain as salary (I have heard it could be as high as 42%). For a private company, no buyer, no liquidity, no cash. But they get slapped with a tax bill, sometimes larger than their salary, on money they haven’t earned,” he said.
“So, if I gave them equity, the choice I would have forced on those engineers was: pay lakhs out of pocket for shares they can’t sell, or give up the equity.”
India vs the rest of the world
The founder of iWish contrasted India’s rules with those in the US, where startup employees generally pay tax when they eventually sell their shares rather than when they acquire them. “In the US employees pay nothing until they sell, and if they hold long enough, they may pay almost nothing at all (federal),” he wrote.
He acknowledged that India has introduced a tax-deferral mechanism for some startups but argued that the provision covers only a small fraction of companies.
Calling for reform, Singh proposed a simple change to the law. “The fix is one line: tax the shares when they are sold, not when they are bought. Every developed country does it. India could do it tomorrow but it does not,” he concluded.
