In a move welcomed by the Indian startup community, Finance Minister Nirmala Sitharaman announced the abolition of the angel tax in the Union Budget 2024-25. This decision, meeting a long-standing demand of Indian startups, is set to invigorate the entrepreneurial ecosystem.
The angel tax, which imposed around a 30 percent tax on investments from angel investors, has been seen as a major hurdle for startups. It required startups to pay tax on the capital raised if it exceeded the company’s fair market value (FMV). This often led to complications and deterred potential investments.
Siddhartha Bagri, Founder & CEO Pravaig, said, “It’s a budget that’s one more step in the direction to allow the Indian market to be exploited further, without gaining anything in return. We need to understand our importance and how to control our economic borders against the monopolistic technocracies that now prevail.
Relief for Startups and Investors
Previously, the 2023-24 budget proposed to include foreign investment under the angel tax. The government stated that any excess premium would be considered “income from sources.” It taxed accordingly, although DPIIT-registered startups were exempted.
“To bolster the Indian startup ecosystem and support innovation, I propose abolishing the angel tax for all classes of investors,” Sitharaman declared while presenting the budget. This announcement follows the Commerce Ministry’s recent recommendation to abolish the 12-year-old law, which had gained significant attention earlier this month.
Entrepreneurs, investors, and venture capitalists have expressed relief and enthusiasm. Mahankali Srinivas Rao, CEO of T-Hub, said, “With projects encouraging innovation and development, the Budget 2024 represents a major turning point for the Indian startup scene. Eliminating the angel tax for all investors is a fundamental action that would help angel investments grow in a more favorable climate, aiding entrepreneurs and opening the path for India to become a worldwide innovation hub.”
“Another forward-thinking plan is establishing an INR 1,000 crore venture capital fund to boost the space sector. This significant investment will drive growth in the space industry by supporting new entrepreneurs and ground-breaking research, putting India at the forefront of space technology and exploration.”
The angel tax, implemented in 2012, aimed to curb unaccounted money by taxing capital raised by unlisted companies beyond their FMV. However, its impact on genuine startup investments has been controversial.
Future Prospects after Abolition of Angel Tax
Abolishing the angel tax is expected to attract new investors and significantly relieve existing ones. It will likely encourage early-stage investments, especially from smaller cities. One prolific angel investor noted, “With the removal of the angel tax, entrepreneurs can attract money from new asset classes, majorly residing in smaller cities.”
The Indian startup ecosystem has garnered global attention, and this move by the government is a crucial step in fostering innovation and growth. The abolition of the angel tax in the union budget marks a significant milestone, providing the much-needed boost for startups to thrive in a competitive economy.
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