The Union Budget 2024-25 offered a big boost for the Indian startup ecosystem as it abolished the ‘angel tax’—a move that has bought cheers to both investors and startup founders. It also brings parity in taxation of both listed and unlisted securities.
“This is the real Dream Budget for startups and is going to help bring a lot of domestic capital into the ecosystem,” said Gopal Srinivasan, MD, TVS Capital. “The Angel tax caused enormous stress amongst early-stage startup investors and founders. It sent a message that the government “frowned” upon start-ups, despite an administration that was gung-ho about promoting them. Dismantling the entire law on entry valuation is a bold move,” he said.
Both angel tax and parity in rate of LTCG tax between listed and unlisted securities has been the industry’s demand for over a decade. This has led to hiccups in growth of domestic Alternative Investment Fund (AIF) pool, which is at around ₹2.5 trillion- just one-tenth of the Indian equity mutual fund pool.
“Scarce domestic capital, largely from private individuals and families, faced friction due to higher LTCG for fund managers and startups in attracting this capital,” Srinivasan added.
Siddarth Pai, Founding Partner, 3one4 Capital, said that IVCA’s advocacy efforts have been recognised in this Budget.
“Companies raising capital from April 1, 2024 onwards won’t have to suffer the threat of angel tax. The extension of the tax to foreign investors in previous years had resulted in a massive drip in funding,” he added.
The move is set to enhance startup funding from both domestic and international sources
“Eliminating the angel tax is a significant milestone for India’s startup community. This change is anticipated to boost investor confidence and speed up the flow of capital, fuelling innovation and growth in our startup ecosystem,” said Sateesh Andra, Founder and Managing Director, Endiya Partners.
Angel tax refers to the income tax levied by the government on funding raised by unlisted companies, or startups, if their valuation exceeds the company’s fair market value. The tax impacts angel investment the most and therefore is called the angel tax.
Under Section 56(2) VII B of the Income Tax Act, the premium received on the sale of shares to a foreign investor is considered ‘income from other sources’ and therefore, taxed accordingly. The move will be a boost for over 1,41,000 DPIIT-registered startups in the country.
“Angel Tax abolished! This is one of the boldest moves made by the Finance Minister. It will be a big boost to the startup world and a game changer. In addition, the space economy will get a boost with a VC fund of ₹1000 crore. Overall, it is a balance budget with a broad brush covering thrust on employment, skilling, infrastructure. It will greatly boost economic activity and will aid in job creation,” said Ninad Karpe, founder and partner, 100X.VC.
