Budget 2026 watch: Nasscom seeks startup-friendly ESOP tax relief and clarity on cloud taxation rules
Ahead of Union Budget 2026-27, Nasscom has urged the government to expand ESOP tax-deferment benefits for startups, allow ESOP costs as a deductible expense, and clarify tax treatment for foreign cloud providers using Indian data centres.
Industry wishlist ahead of 1 February Budget
With the Union Budget 2026-27 due on 1 February 2026, India’s technology industry body Nasscom has laid out a set of proposals aimed at easing the tax burden for startups and improving certainty for global cloud players operating through Indian data centres. The industry argument is straightforward: early-stage companies compete on talent and speed, and policy friction around employee compensation and cross-border digital infrastructure can slow growth.
Nasscom’s memorandum, as reported, focuses heavily on Employee Stock Option Plans (ESOPs), a key tool that startups use to attract and retain skilled employees when cash compensation is constrained. The association wants the tax-deferment regime for ESOPs to be extended to a wider set of startups, saying a broader scope would make the policy more meaningful and improve competitiveness against larger firms.
ESOP deductions and a push for clearer rules
Beyond deferment, Nasscom has also sought the ability for ESOP-related costs to be treated as deductible under Section 37 of the Income Tax Act. The underlying idea is to recognise equity-based compensation as a legitimate business cost rather than leaving it in a grey zone that varies by interpretation and can create disputes.
The second major theme is cloud regulation and taxation certainty. Nasscom has asked for explicit clarification that hosting or co-location services from Indian data centre operators should not, by itself, create a “permanent establishment” for foreign cloud providers. If left unclear, companies may face uncertainty about when and how they become taxable in India, affecting investment decisions and pricing models for enterprise customers.
Why this matters for investment and jobs
The business impact of these proposals sits at the intersection of fundraising, hiring and India’s role as a digital services hub. ESOPs can be the difference between a startup retaining top engineers or losing them to larger employers, while stable tax rules for cloud infrastructure influence where global providers place capacity, compliance teams and long-term contracts.
As budget discussions intensify in the final days of January, Nasscom’s asks reflect a broader narrative from the tech sector: reduce friction in talent compensation, offer predictable compliance, and support a regulatory environment that makes it easier for both Indian startups and global technology firms to scale in India.