2024 Budget Boost: Angel Tax Abolished, New Incentives for Startups and Innovation
Updated: Aug 10
Image courtesy: Entrackr
In the Union Budget for 2024-25, significant support was extended to the Indian startup ecosystem with the abolition of the 'angel tax'. This regulation had been a significant source of frustration for both investors and startup founders.
Finance Minister Nirmala Sitharaman emphasized during the Budget presentation,
"To strengthen the Indian startup ecosystem, encourage entrepreneurial initiatives, and foster innovation, I propose to eliminate the so-called angel tax for all categories of investors."
Key Reforms in the 2024 Budget: A Boost for Indian Startups
Image courtesy: TICE News
1. Complete Removal of Angel Tax
In her seventh Budget speech, Finance Minister Nirmala Sitharaman announced the complete removal of the angel tax, providing significant relief to Indian startups.
Effective from April 1, 2024, startups will not be taxed on investments received above the fair market value of their shares issued from this date. This change is expected to boost domestic investments in Indian startups.
Padmaja Ruparel, Co-founder of the Indian Angel Network, mentioned that
"This will open up for the domestic capital for Indian startups as an asset class"
Additionally, it reduces the compliance burden on startups, which previously had to obtain two valuation reports for FEMA and tax purposes, ensuring the FEMA valuation did not exceed the tax FMV by more than 10%.
2. Historical Context of Angel Tax
The angel tax, which has been a concern for over a decade, was part of Section 56 (2) (vii b) of the Income Tax Act 1961, taxing capital received by unlisted Indian companies over their fair market value as "income from other sources" at 30.9%.
Previously, the DPIIT exempted certain registered startups from this tax if they met specific criteria, including a cap of Rs 10 crore on paid-up share capital and share premium, and a minimum average returned income for angel investors.
3. Reduction in Long-term Capital Gains Tax
Furthermore, the long-term capital gains tax on financial and non-financial assets has been reduced to 12.5%, down from nearly 20%. This aligns the tax rate for gains from sales of shares in startups and unlisted entities with that of listed shares.
Anirudh Damani of Artha Venture Fund highlighted, "This will unlock domestic capital from family offices and others for the AIF (Alternative Investment Funds) category. As a venture fund, we invest for the long term, and the clause frees up a large portion of the funds raised for investment rather than paying taxes"
Anshul Khemuka from Khaitan & Co. pointed,
"The change in long-term capital gain tax will benefit an employee at a startup holding shares in the company as part of ESOPs and looking to exit pre-IPO through secondaries"
4. Taxation on Share Buybacks
Image courtesy: Vinod Kothari Consultants
Another significant change is the proposal to tax income from share buybacks in the hands of the recipients, affecting startup employees with ESOPs.
Previously, companies paid a flat 20% tax on buybacks, but now it will be taxed as per the employee's income tax slab.
Anish Shah from BDO India noted that this change will make it harder for startups to return funds to investors tax-efficiently.
Khemuka added that non-resident shareholders might seek treaty benefits to mitigate this impact.
5. Venture Capital Fund for Space Economy
The Budget also announced a Rs 1,000 crore venture capital fund to boost the space economy over the next decade, in line with the government’s goal to open up the space sector to private investment and FDI.
6. Development of Digital Public Infrastructure
Additionally, the Finance Minister proposed developing digital public infrastructure (DPI) applications to enhance productivity and opportunities in sectors such as credit, e-commerce, education, health, law and justice, logistics, MSMEs, service delivery, and urban governance.
Digital Public Infrastructure (DPI) for agriculture was also proposed to conduct crop surveys across 400 districts.
7. A New Dawn for Indian Startups
In Conclusion, Finance Minister Nirmala Sitharaman's latest Budget introduces several crucial reforms aimed at fostering growth and reducing the regulatory burden on Indian startups.
The abolition of the angel tax and reduction in long-term capital gains tax are particularly significant, offering much-needed relief and encouraging domestic investments.
The changes in taxation on share buybacks and the introduction of a venture capital fund for the space economy further underline the government's commitment to supporting innovation and private investment.
Additionally, the proposed digital public infrastructure applications promise to enhance productivity and opportunities across multiple sectors.
These measures collectively create a more conducive environment for startups, aligning with India's broader vision of becoming a global innovation hub.
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