Great news for startups as India moves to abolish angel tax

Presenting the Union Budget 2024-25, Finance Minister Nirmala Sitharaman on Tuesday proposed to abolish the angel tax, meeting one of the longstanding demands of Indian startups.

The angel tax, widely considered detrimental to the startup ecosystem, mandated around a 30% tax on investments from external investors, also known as angel investors.

Through its budget for 2023-24, the government had proposed to include foreign investment under the ambit of the angel tax. The government had said the excess premium would be considered as “income from sources” and face taxes up to over 30%. Though it had exempted Startups registered with the Department of Promotion of Industry and Internal Trade (DPIIT).

“To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation I propose abolishing angel tax for all classes of investors,” Sitharaman said while presenting the Budget 2024-25.

Earlier this month, the buzz around the angel tax picked up momentum with the Commerce Ministry recommending the abolishment of the 12-year-old law.

Unsurprisingly, the startup community, including entrepreneurs, investors, and VCs, have welcomed the proposal to abolish the tax.

“Finally, it's Good to see #angeltax abolished .#BudgetSession . Long overdue. So much harassment,  headache , unwanted anguish for startup founders , angel investors. Very welcome . One less Tax terrorism avenue,” said K Ganesh, a serial entrepreneur who promoted and invested in several unicorns and startups via growthStory.

India implemented angel tax in 2012 to help tackle unaccounted money raised through capital received from resident investors in a closely held company in an excess of the fair market value.

Besides providing huge relief to investors, the move is likely to get interest from new investors as the taxation has now been eased out.

“This will give a fillip to early-stage startup investment in the country. With removal of angel tax, entrepreneurs will be able to attract money from new asset classes, majorly residing in smaller cities,” said one of the prolific angel investors who also runs a micro-VC firm.

Titan Capital co-founder and angel investor Kunal Bahl, All In Capital founder Kushal Bhagia, Capital Mind founder Deepak Shenoy and former Finance Minister P Chidambaram also took to X to express support for the removal of angel tax.