Indian Startup Ecosystem Celebrates Removal of Angel Tax, 12 Years After Introduction
The Indian startup ecosystem has experienced ups and downs over the past few years, but one of its most persistent demands has finally been met.
The Indian government has scrapped the angel tax on startup investments. Finance Minister Nirmala Sitharaman made the announcement while presenting the Union Budget today. “To bolster the Indian startup ecosystem, boost the entrepreneurial spirit, and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” she stated.
The ‘angel tax’ was introduced in 2012 under the Congress-led UPA government and was outlined in Section 56(2)(viib) of the Income Tax Act. It aimed to regulate funding received by unlisted companies from angel investors to prevent money laundering and the inflow of unaccounted money. The provision taxed funds raised through share premiums exceeding the fair market value (FMV) of the shares issued, classifying such investments as “income from other sources” and imposing a 30 percent tax.
This tax burdened young startups, requiring them to pay a significant portion of their raised funds as tax. It also led to valuation disputes with tax authorities. For years, the Indian startup community had been lobbying the government to remove this tax.
Following the formal announcement of the tax’s removal, founders and entrepreneurs expressed their delight. Snapdeal founder Kunal Bahl tweeted, “Angel tax abolished! Fantastic news!”
Mamaearth founder Ghazal Alagh praised the move: “The 2024-2025 budget marks a significant leap forward for the startup ecosystem. Removing the angel tax will provide much-needed relief and encourage more investments.”
Innov8 founder Ritesh Malik thanked the government: “Abolishment of angel tax is a big win. Thanks to Hon. FM Nirmala Sitharaman and PM Narendra Modi for this.”
Promoter and angel investor K Ganesh welcomed the move: “Finally, it’s good to see #angeltax abolished. Long overdue. So much harassment, headache, and unwanted anguish for startup founders and angel investors. Very welcome. One less avenue for tax terrorism.”
Vikram Gupta, Founder and Managing Partner of IvyCap Ventures, highlighted the positive impact: “The abolition of the angel tax is a big relief. This has been a long-standing demand within the industry. 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.”
While the startup ecosystem is jubilant, some have noted that the tax’s abolition begins next year, meaning startups that raised funds until then will still have to pay the tax and continue fighting their cases in court. Nonetheless, with no angel tax going forward, India’s startup ecosystem finally has a reason to celebrate during these challenging times.