Budget 2024: FM Nirmala Sitharaman abolishes ‘Angel Tax’ to support Indian startups

Union Finance Minister Nirmala Sitharaman, while presenting her seventh consecutive Budget in Parliament on Tuesday, proposed to abolish the Angel Tax. She said the Indian startup ecosystem is buzzing with innovation and ambition, but Angel Tax often sparks debate.

“To bolster the Indian start-up eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” the finance minister said.

What is Angel Tax?

Contrary to its name, Angel Tax is not a tax incentive. It is a provision under Section 56(2)(viib) of the Income Tax Act, 1961. This provision classifies investments received by startups from external investors as "income from other sources" and taxes them at a rate of 30%.

How does Angel tax affect startups?

Young startups, already low on funds, may struggle with the added tax burden on top of operational costs due to the Angel Tax. Taxing premiums above the "fair market value" of shares can also lead to valuation disputes with tax authorities. The extra tax liability can deter investment, stifling the innovation and growth the government seeks to promote.

What do startup founders say?

Prateek Jain, Associate Director-Starup and Alliances, Alliance of Digital India Foundation, said the abolition of the 'angel tax' is a game-changer, removing a significant barrier that has long hindered the growth of startups and discouraged investment.

“This progressive step will undoubtedly foster a more vibrant and dynamic startup ecosystem, encouraging innovation and entrepreneurship across the country,” Jain told LiveMint.

“We welcome the Union Budget 2024-25 as a pro-development budget bringing great news for startups. As a founder and angel investor, I’m thrilled that the Angel Tax has been abolished. This will significantly bolster the entrepreneurial ecosystem in India,” said Ashish Singhal, Co-founder, Lemonn and CoinSwitch. 

The emphasis on digital public infrastructure and the digitalization of the economy will greatly benefit tech startups, which are focused on developing population-scale apps for Indians, he added. 

Sandeep Agrawal, Director and Co-Founder of TeamLease RegTech, said the abolition of the angel tax will boost the entire Start-up ecosystem and is viewed as pro-business and pro-innovation measures that will stimulate economic growth and job creation.

“Steps like comprehensive digitalization of taxpayer services, simplification and rationalization of the GST tax structure, and integration of the e-shram portal with other platforms to offer a unified labour services solution, etc. indicates government’s commitment towards digitalization aimed at building transparency and enhancing ease of compliances for corporates in India,” he said.