The Indian startup ecosystem has had an indifferent time over the last few years, but one of its longest-standing demands from the government has finally been fulfilled.
The Indian government has scrapped the angel tax on startup investments. The announcement was made by Finance Minister Nirmala Sitharaman while presenting the Union Budget today. “First of all, to bolster the Indian startup eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” she said.
The so-called ‘angel tax’ was introduced in 2012 under the Congress-led UPA government. Enshrined under Section 56(2)(viib) of the Income Tax Act, it was designed to regulate funding received by unlisted companies from angel investors. The primary aim of this provision was to prevent money laundering and the inflow of unaccounted money into the startup ecosystem by taxing funds raised through share premiums that exceed the fair market value (FMV) of the shares issued. As a result of this provision, startups had to classify angel investments into their companies as “income from other sources”, and had to pay a 30 percent tax on it.
Angel tax was a burden for young startups, which had to pay a substantial amount of the money they’d raised as tax to the government. Also, since angel tax taxed premiums above the “fair market value” of shares, it led to valuation disputes with tax authorities. For years, the Indian startup community had been lobbying with the Indian government to remove this tax.
Now that the government has formally announced the scrapping of angel tax, founders and entrepreneurs were effusive in their praise. “Angel tax abolished! Fantastic news!” wrote Snapdeal founder Kunal Bahl.
Mamaearth founder Ghazal Alagh also praised the move. “The 2024-2025 budget marks a significant leap forward for the startup ecosystem. Removing the angle tax will provide much-needed relief and encourage more investments,” she said.
Innov8 founder Ritesh Malik also thanked the government. “Abolishment of angel tax is a big 1..thanks Hon. FM Nirmala Sitharaman and PM Narendra Modi for this,” he said.
Promoter and angel investor K Ganesh said the move was very welcome. “Finally, it’s Good to see #angeltax abolished. Long overdue. So much harassment, headache , unwanted anguish for startup founders , angel investors. Very welcome . One less Tax terrorism avenue,” he said.
“The abolition of the angel tax is a big relief. This has been a long-standing demand within the industry, and it was music to our ears when we heard the announcement. The impact of this move is expected to be substantial, potentially adding 30 to 40% more capital from angel investors into the startup ecosystem in the near term. This influx of capital will benefit startups significantly,” said Vikram Gupta, Founder and Managing Partner, IvyCap Ventures.
While the startup ecosystem appears jubilant, there is a little detail that some have pointed out — the tax has been abolished starting only next year, which means that all startups which raised funds until then will still have to pay the tax, and likely continue to fight their cases in the courts. But with no angel tax going forward, India’s startup ecosystem — in these rather bleak times — finally has some reason to cheer.