Budget 2024 : Government Abolishes Angel Tax
In a significant relief for angel investors and a boost to early-stage investments in startups, the government has decided to abolish the controversial angel tax. This tax, levied on funding raised by startups and unlisted companies if their valuation exceeds the company’s fair market value, has been a longstanding demand of industry associations and investment bodies for its removal.
The move comes at a critical time when startup funding has plummeted to a five-year low, with $7 billion in 2023 compared to $25 billion in 2022, marking a 73 percent decrease last year.
Details of the Change:
Section 56 (II) (viib) of the Income Tax Act, known as the angel tax, applies to any consideration of the issue of shares that exceed the fair value of these shares issued by a privately-held company. The abolition of the angel tax will be effective from April 1, 2025, and applicable from the assessment year 2025-26, as per the Budget statement.
Industry Reactions:
The startup ecosystem has widely welcomed the move.
“The announcement of the abolishment of angel tax has come at the most opportune time, especially since global startup funding has seen a decline of almost 30% in the last year. Reducing the tax on long-term capital gains arising from the sale of shares of startups to 12.5% will boost further innovation and entrepreneurship among the startup community and may even attract further global investors to India. This move mirrors tax measures of other major nations, propelling Indian GDP growth. Furthermore, with 44% of Indian startups situated outside large cities, such a step will further boost the expansion of innovation hubs in Tier-2 and Tier-3 cities, thereby promoting balanced regional development and tapping into India’s talent pool. This would foster a more risk-capital-friendly environment, increasing the likelihood of home-grown global digital behemoths, while also lowering technology dependence and promoting economic sovereignty in the long run.” – Navin Honagudi, Founder & Managing Partner of Elev8 Venture Partners.
“The scrapping of angel tax is great news for the startup ecosystem as it will make early-stage investment frictionless,” said Jai Vardhan, co-founder of Entrackr, a media venture tracking startups and the internet economy in India. He added that this would also encourage investors who were previously hesitant due to heavy taxation.
Although startup funding rebounded in 2024, reaching nearly $7 billion during the first half of the year compared to $5.92 billion in the same period last year, the abolition of the angel tax is expected to provide a significant boost. For perspective, funding reached $20 billion in the first half of 2022.
Implications for Startups:
The proposal to eliminate the angel tax will create an instant pool of capital for startup founders. Early-stage startups heavily rely on angel investments. The abolition of this tax will provide financial liberty for founders and encourage angels to make more substantial investments.
Government’s Commitment:
The move underscores the government’s commitment to fostering innovation and supporting early-stage ventures. It would create a more vibrant and dynamic investment landscape, bolstering confidence among foreign investors considering India as a viable investment destination.
The abolition of the angel tax is poised to transform the investment landscape, making it more attractive for investors and fostering a robust environment for startups to thrive and innovate.
