Securing early stage funding is often a challenge for startup founders due to a set of challenges. One of them being the tax on early stage funding. Founders often experience financial hardship and a lack of funding, which are critical in the early stages of growth. They frequently need more money to finance operations, enter new markets, and invest in launching products. Angel investors provide crucial capital to startups in exchange for convertible debt or equity ownership at an early stage, making fundraising essential.
Finance Minister Nirmala Sitharaman's decision to completely revoke the angel tax is a commendable step towards alleviating the financial burden on the Indian startup ecosystem. The angel tax was imposed on the capital raised by unlisted companies through the issuance of shares to Indian investors when the share price exceeded the company's fair market value. The excess amount was considered income and taxed accordingly. This move brings Indian startups closer to finding a solution for their funding challenges.
"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," Finance Minister Nirmala Sitharaman disclosed during Union Budget 2024.
In her speech, she further announced various changes in tax rates for certain financial instruments including e-commerce players concerning long-term capital gains.
Financial & non-financial assets are levied with a 12.5 % tax rate on their long-term gains, while TDS rates are brought down to 0.1%, a shift from 1% for e-commerce operators.
Gaurav Jain, founder and CEO at @investyadnya (SEBI RA & RIA) shares budget highlight for retail investors, “Short term gains of Equity at 20% tax rate (earlier 15%), Long term gains on all Equity at 12.5% (earlier 10%), Increase in limit of exemption of capital gains to ₹1.25 lakh per year (earlier ₹1.0 Lakh), Angel Tax abolished, Std Deduction increased to 75k (earlier 50k) for New Tax Regime, Gold & Silver import duty decreased to 6% (from 15%), Some benefits with Tax slab change under new tax regime as attached, Indexation benefit removed from Real Estate. Long Term taxation at 12.5%, same as Equity. Holding period 2 years. FoF, Gold Funds and ETFs, International Funds will be tax after 2 years at 12.5% (not very clear).”
“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,” posted K Ganesh, 4X serial entrepreneur on X.
Angel tax levied in 2012 had several drawbacks. They apply to Indian residents’ funded startups, funding earned from non-resident investors and venture capital does not qualify for the angel tax deduction, and more importantly, startups tend to bear a significant amount of monetary loss in the form of taxes as they had to share bigger part of their raised investment.
"The new budget is a game-changer! Significant impetus has been provided by the government to further strengthen the startup ecosystem. Happy to see support for Space Tech and a generous ₹1 Lakh Crore allocation for R&D in the private sector. The support for small nuclear reactors is commendable; moreover, the abolishing of the Angel Tax will go a long way in bringing greater investments, making it a big win for startups. Similarly, there’s great support for MSMEs and an impressive job-linked incentive scheme. The focus on Ease of Doing Business and the introduction of plug-and-play manufacturing infrastructure under PPP, along with worker dormitories, is a well-rounded approach to foster growth and innovation," said Ajai Chowdhry, Co-Founder HCL, Founder & Chairman, EPIC Foundation and Chairman-Mission Governing Board, National Quantum Mission.
As discussed, the majority of startups are not in a condition to afford monetary loss of any kind, and that is in the initial phase of their business. The introduction of angel tax in the slab faced so much criticism from entrepreneurs, investors, and industry analysts.
Numerous pleas were made by the startups, then some relaxations were implemented by the Indian government in the 2019 Budget. The startups being registered with the Department for Promotion of Industry and Internal Trade (DPIIT) become exempted from this tax.
Ravi Mittal, Founder & CEO of QuackQuack, feels abolishing Angel Tax will have favourable long-term implications for the Indian startup ecosystem, “This 2024-25 Union Budget is highly influential to ensure long-term success in the startup ecosystem. By doing away with the Angel Tax, startups have been enabled to encourage a renewed business approach and enhance valuation. This will enable startups to undertake expansion initiatives without concerns about taxation, while also attracting increased funding from angel investors. Furthermore, the centre’s emphasis on upskilling will provide a viable pipeline of trained professionals for startups, ensuring long-term growth and scalability,”
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