Article · 15 min read

Sweat Equity in India: Eligibility, Restrictions, Tax Treatment

Priya Kapasi Shah · Treelife Free Intermediate India

This is the exact CA-firm explainer for the trap in the answer: it walks the two-stage tax on sweat equity, first as a perquisite under Section 17(2)(vi) at allotment (FMV minus what you paid, taxed at your slab in the year of grant), then as capital gains on sale (sale price minus allotment FMV). It cites the actual sections and rules, so you can hand it to your CA and check the maths on a discounted grant before you issue it.

  • At allotment, FMV minus the price you paid is taxed as a salary perquisite at your slab rate, even though you got no cash
  • On sale, only the gain above the allotment FMV is capital gains (12.5% LTCG on unlisted shares held over 24 months post-2024, no indexation), so there is no double tax
  • Founders issuing sweat equity to themselves at a discount can trigger a real tax bill on paper value, which is why valuation and timing must be set with a professional
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The question it answers

  1. How does founder equity actually get taxed in India, and will I owe tax the moment I get my shares or when I sell?

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