Normally, ESOP perquisite tax is due in the year you exercise — even though you receive illiquid shares, not cash. To ease this "dry tax", employees of eligible startups (recognised under Section 80-IAC) can defer the tax deduction.
The deferred tax becomes payable at the earliest of: roughly five years from the end of the year of allotment, the sale of the shares, or the date you leave the company. The amount of tax doesn't change — only its timing — but for employees of growing startups that timing difference is often the difference between exercising and letting options lapse.
If your company qualifies and your ESOP communication doesn't mention this, employees are undervaluing their grants. Worth fixing.