India’s Finance Minister Nirmala Sitharaman abolishes Angel Tax for Indian startups

In an attempt to encourage more investments in the Indian startup ecosystem, Union Finance Minister Nirmala Sitharaman announced that the angel tax will be abolished for all classes of investors.

The angel tax, which was originally introduced in 2012 to prevent money laundering, allowed taxing a startup's funds if the investment exceeded the fair value of shares as determined by a merchant banker.

Over the years, startups and investors have complained about genuine investments being unfairly targeted by tax authorities.

Notably, the corporate tax rate to be reduced on foreign companies from 40 to 35%.

The development comes after Minister Piyush Goyal said that the angel tax was implemented to prevent fraudulent entities from artificially inflating valuations and raising capital. He had emphasized the importance of increasing domestic funding for startups, expressing concern that foreign investors often end up owning a significant portion of companies founded by talented young entrepreneurs.

"If someone wants to come back to India, they will have to pay the tax, as discrimination would be very difficult to justify. They (startups) did not go out because of pressure or any reason. They went out for better tax planning. If they pay some tax here, it will help us give some more scholarships to poor children, it will help us make a few houses for the poor, it will help us replace slums with proper housing," he had said.

Industry reaction

Abolishment of Angel Tax would boost investments in the startup ecosystem

"We are delighted by abolition of angel tax. This would boost investments in the startup ecosystem and create jobs. We are also delighted to see that government is moving towards parity in taxation between financial asset classes as well as non-financial assets. Additionally, credit boost to MSME sector with guarantees, reduction of corporate tax rate on foreign companies from 40% to 35% and some minor improvements to New tax Regime promotes job & economic growth," said AltGraaf Jayaprakash, K, Chief Growth Officer, AI Growth Limited (Parent company of altGraaf).

Angel tax abolishment to bolster the Indian tech startup ecosystem

"CoinDCX welcomes the Finance Minister’s announcement in today’s budget regarding the abolition of the Angel tax for all classes of investors. We are confident that this will significantly bolster the Indian tech start-up ecosystem, especially in the Web3 sector. India stands at the forefront of the global Web3 ecosystem with a network of over 1,000 startups spanning diverse sectors," said Sumit Gupta, Co-founder, CoinDCX.

"Collectively, these Indian Web3 startups have secured funding exceeding $2.5 billion, reflecting the landscape's robust growth and investment potential. In 2023, Indian Web3 projects secured approximately $270 million in funding. These figures indicate investors’ interest in the region's early-stage Web3 innovation.As Web3 becomes more mainstream, investment in Web3 startups is expected to increase. The abolition of the Angel tax will definitely benefit Indian founders, especially those leading early-stage Web3 companies in India," Gupta said.

Removal of Angel tax to open up opportunities for startups

"This is a very progressive step in the right direction by the finance minister. This will not only open up opportunities for startups to freely raise capital from India’s thriving middle class, but also significantly reduce disputes and tax uncertainties. We wholeheartedly welcome this step," said Ravi Kaushik, Executive Director, Head of Asia Investments, Flourish Ventures.

A game-changing move

"The Union Budget 2024 has delivered a landmark decision for India's startup ecosystem. The abolition of angel tax for all investor classes is a game-changing move that signals the government's unwavering commitment to nurturing our nation's innovative spirit. This pivotal reform will inject much-needed momentum into our startup landscape, which has faced headwinds recently," said Abhinav Jain, Co-Founder & CEO of Almonds AI.

"By removing this significant barrier to investment, the Budget 2024 is not just opening doors – it's constructing highways for capital to flow into groundbreaking ideas. This bold step, building upon previous initiatives like the Startup India program, positions India to regain its growth trajectory in the startup space. The Union Budget 2024 sends a clear message: India is not only open for business but is actively cultivating the next wave of entrepreneurs who will propel our economy forward," Jain said.

Abolishment of Angel tax has the ability to bring a lot of regulatory clarity

"While we have to still read the complete change on the abolishment of angel tax but on the face of it, this action has the ability to bring lot of regulatory clarity which generally is appreciated by the investor communities across the world. This should help founders looking to raise capital both in domestic and international markets," said Ankur Mittal, Cofounder of Inflection Point Ventures.

Abolishment of angel tax will provide a huge fillip to startups

"Abolishment of angel tax for all classes of investors will provide a huge fillip to the start-up sector that in the past had witnessed funding winter. This will bring in the much-needed capital, especially from the foreign investors to the growing start-up ecosystem of the country and aid in their future growth," said Parimal Heda, Chief Investment Officer, Go Digit General Insurance.

"The Union Budget 2024 has maintained its commitment to fiscal prudence yet announced various tax-friendly measures for the Indian taxpayers. From the perspective of the Insurance Sector, amendment made by the government to clarify various activities in insurance sector as neither a supply of goods nor a supply of services is an extremely positive measure for the sector. This will immensely reduce compliance and ongoing litigation burden and provide overall stability to the sector," Heda said.

Angel tax was an albatross that hindered much-needed capital for deserving founders

"This was an albatross that hindered much needed capital to be deployed to deserving founders. Removal of this dreaded tax will give a huge fillip to startups in the country and free up investors to focus on the investments without having anxiety on how to deal with their implications. A few other things that work well for deep tech focused funds like us. The rooftop solar policy, the pumped storage policy and research and development for small & modular nuclear reactors, Bharat small reactors, R&D for small modular reactors, R&D for new technology in nuclear form a neat troika to alter the energy map of India. Specially on the nuclear side, it positions India to replicate the renaissance that nuclear is experiencing in the US," said Mayuresh Raut, Managing Partner, Seafund.

Removal of the Angel tax will streamline the investment process

"The removal of the angel tax will make it significantly easier for us to complete transactions faster and streamline the investment process. Previously, the requirement for income tax officers to understand and assess valuations led to unnecessary conflicts and delays, involving CAs, valuers, and tax officials. Valuation assessments were never meant to fall within the purview of income tax officers, and this change eliminates those complications. 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," said Anirudh A Damani -Managing Partner - Artha Venture Fund. 

A significant boost to the budding Indian startup ecosystem

"Abolition of angel tax will provide a boost to the budding Indian startup ecosystem. It will encourage the flow of capital without tax leakages, especially relevant at a time when the funding crunch is impacting startup liquidity. It is key to establish India as an innovation hub and leader vs follower for new and breakthrough ideas. Focus of the budget is on sustainable growth with employment generation, of continuity and stability. The changes on the capital gains tax structure was unexpected, especially during a time when the fiscal position of the economy seems to be in check," said Ratna Mehta - Managing Partner, Fundalogical Ventures.