India scraps angel tax in boost for startups

In a relief for the startup ecosystem in India, finance minister Nirmala Sitharaman on Tuesday proposed the abolition of the so-called angel tax for all classes of investors.

In her budget speech, Sitharaman said the decision would bolster the Indian startup ecosystem.

Angel tax was levied at a steep 30.6% on investments received by an unlisted company that were more than their fair market value.

“After persistent advocacy from the startup community, the government has finally removed the angel tax for all classes of investors. This is a significant win for us all,” Vineet Khurana, chief executive officer at Startup Accelerator Chamber of Commerce India, said in a post on LinkedIn.

“This move will likely boost the confidence of angel investors to support early-stage startups,” Khurana said.

Ahead of the budget, the commerce ministry had presented a demand from startups to scrap the angel tax.

The angel tax was introduced in 2012 as a step against money laundering.

Under section 56 (2) VII B of the Income Tax Act, if a startup issues shares at a price exceeding fair market value, the difference is taxed as income from other sources.

Startups that relied on angel investment voiced their concerns, stating that unclear valuation methods prevent angel investors from making investments.

Adding to their woes, the Finance Act 2023 had extended angel tax provisions to non-resident investors from April 2024.

There are 141,323 DPIIT-recognised startups in India.