Finance Minister abolishes angel tax to boost startup investments

In a move to encourage more startup investments in the country, Finance Minister Nirmala Sitharaman announced on July 23 that the angel tax will be abolished for all classes of investors in the Budget 2024. Additionally, the Union government will establish a Rs 1,000 crore venture capital fund to boost space startups. The minister mentioned that the Indian space economy will expand fivefold over the next decade but did not elaborate on which entity would set up the fund or how the funds would be invested.

"The announcement of the removal of the Angel Tax for all classes of investors is a huge reform. This is essential for startups to remain in India and grow from here. This is a major step forward for Indian startups and a watershed moment in the Indian startup story," said Siddarth Pai, Managing Partner, 3One4 Capital.

"A tax on capital is antithetical to capital formation and has long been used to harass startups and investors. Given the mandatory dematting of securities, Section 68, and the disclosure of unlisted investments in tax returns, the transparency gap that the Angel Tax was created to address has been plugged. It took 12 years, but the startup industry can now heave a sigh of relief that the dreaded angel tax has been removed," he added.

Manoj Agarwal, Managing Partner of Seafund, said, "As a deep tech-focused VC fund, the Finance Minister's announcement of a Rs 1000 crore space economy VC fund and an R&D fund of Rs 1 lakh crore will act as a strong catalyst for startups in deep tech and space tech. This Budget has addressed several longstanding demands of the industry. Rationalizing LTCG to 12.5% for all financial and non-financial assets is also a step towards bringing parity between listed and unlisted companies."

Agarwal further stated, "However, the biggest takeaway from the Budget is the removal of the angel tax. This will ease the process of raising funds for early-stage founders and will encourage more early-stage investors and angels to consider startup investing as a fruitful asset class. In our view, this single announcement is a small step towards making angel investment accessible for people with investment capital that currently goes to markets and mutual funds."

Anil Joshi, Managing Partner, Unicorn India Ventures, “The 1000 Cr fund of funds for space tech is testimonial to India’s capability in coming up with breakthrough solutions at low cost. This will certainly help space tech companies to look for much needed early stage capital to get started. This will certainly help mobilise over Rs 4000 Cr, great move.”

Joshit said, “Angel Tax abolishment was long pending, glad that Hon. FM has heard industry voices and has finally abolished it. This will certainly help in expansion of angel investment in India and will take away a lot of burden from the minds of everyone on tax notice for tax paid investment. This will also free up a lot of domestic capital and improve the funding sentiment in a strong way.”

Last year, a change in the angel tax provision introduced in the Union Budget raised concerns about startup investments in the country by foreign investors. This was because an exemption for money raised from foreign investors under the so-called angel tax regime was removed in the Finance Bill, 2023.