Budget 2024: Huge relief for startups as angel tax abolished
The abolition of the angel tax is expected to increase the fund flow into the Indian startup ecosystem and reduce the tax compliance burden for founders.
Union Budget 2024-25 offered a big boost for the Indian startup ecosystem as it abolished the 'angel tax'—a regulation which was a major irritant to both investors and startup founders. This is expected to give a boost to fund inflow into startups.
While presenting the Budget, Finance Minister Nirmala Sitharaman said, “First of all, to bolster the Indian startup ecosystem, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors.”
This has come as a huge relief for the Indian startup ecosystem as the angel tax impacted capital inflow and increased the tax compliance burden for startup founders.
“The announcement of the removal of angel tax for all classes of investors is a huge reform. This is essential for startups to remain in India and build from here. This is a major step forward for Indian startups. It is a watershed moment in the Indian startup story,” said Siddarth Pai, Founding Partner, 3one4 Capital.
Angel tax was introduced in 2012 to plug the loophole used by certain unscrupulous entities that avoided paying tax by creating subsidiaries. Unfortunately, this provision, under Section 56(2)(viib) of the Income Tax Act, 1961, negatively impacted startups seeking early-stage investments as authorities applied the mechanism of fair market value (FMV) of shares on the funding raised.
It levied a 30% tax burden on startups if the investment was “assessed” to be above the FMV.
Inflection Point Ventures Cofounder Ankur Mittal said, “This should help founders looking to raise capital both in domestic and international markets.”
A pre-Budget memorandum issued by NASSCOM stated that the FMV of asset-light tech companies is based on future assumptions and therefore can be easily questioned, and risks genuine investments being taxed at a high rate. “This creates serious impediments in raising capital,” it noted.
The industry body also noted that while there were attempts to address the problems that came with the angel tax, the core issue of “taxing perfectly legitimate capital investment” as income had not been addressed. Further, no study has highlighted whether the provision led to better enforcement of tax compliance.
“The elimination of the Angel Tax will boost confidence among investors in India, particularly at a time when startup funding is declining. According to our report, the Indian startup ecosystem saw a 13% decrease in funding in H1 2024 compared to H1 2023,” Neha Singh, co-founder, Tracxn, said.
The proposal to eliminate angel tax will allow founders and investors to focus on their core competency.
Artha Venture Funding Managing Partner Anirudh Damani said, “This simplification allows us to focus on our primary job—investing in and supporting innovative startups—without the burden of navigating through cumbersome tax regulations.
“It took 12 years, but the startup industry can heave a sigh of relief that the dreaded angel tax has been removed,” Pai remarked.
Edited by Kanishk Singh