Budget 2024: Tax abolished, angels get back wings

The proposal to do away with angel tax will also create an instant pool of capital for startup founders. Image: Shutterstock

In a major relief to angel investors and a boost to early-stage investment in startups, the government has decided to abolish the ‘contentious’ angel tax. Income tax levied on funding raised by startups and unlisted companies if their valuation exceeds the company’s fair market value, scrapping of angel tax has been a long-standing demand of industry associations and investment bodies.

The move to scrap angel tax comes at a time when startup funding has hit a five-year low—$7 billion in 2023 against $25 billion in 2022—and dipped 73 percent last year.

Industry analysts, observers, and investors welcome the move. “The scrapping of angel tax is great news for the startup ecosystem as it will make early-stage investment frictionless,” says Jai Vardhan, co-founder of Entrackr, a media venture tracking startups and the internet economy in India. The move will also nudge investors sitting on the fence due to heavy taxation. “They will now take a plunge,” adds Vardhan.

Though startup funding has rebounded in 2024—nearly $7 billion during the first half of 2024 as against $5.92 billion raised during the corresponding period last year— the ecosystem will get a major fillip with the abolition of the angel tax. For perspective, funding reached $20 billion in the first half of 2022.

The proposal to do away with angel tax will also create an instant pool of capital for startup founders. Early-stage startups rely heavily on angel investment. “Angle tax was a barrier that hindered companies' growth by interfering with their early financial plans,” says Milan Sharma, founder of 35North Ventures, a SEBI-regulated venture capital based out of Mumbai. The abolition of angel tax will usher in financial liberty for the founders. “It will also encourage angels to make meatier bets,” he adds.

Also read: Budget 2024: Space tech founders, VCs welcome signalling impact of new Rs1,000-crore fund

The move also underlines the government’s sincerity in walking the talk to boost startup funding and innovation. “This shows government’s commitment to foster innovation and support early-stage ventures,” says Vikram Chachra, founding partner at 8i Ventures. “Now, one can expect a more vibrant and dynamic investment landscape,” he points out. It will also bolster confidence among foreign investors looking at India as a viable investment destination, adds Chachra.

Ninad Karpe, founder and partner of 100X.VC, reckons the abolition of angel tax will have a multiplier effect. “This is one of the boldest moves made by the finance minister. It will be a big boost to the startup world and a game changer,” he says. In addition, the space economy will get a boost with a VC fund of Rs 1,000 crore, adds Karpe.