Budget 2024: Investors welcome move to scrap controversial Angel tax on startups

Union minister Ashwini Vaishnaw said the move will spur investment in startups. Congress leaders P Chidambaram and Shashi Tharoor also applaud move to scrap it.

Finance minister Nirmala Sitharaman on Tuesday announced the government's decision to scrap the controversial angel tax as part of union budget announcements. The move is expected to encourage investments into startups and spur innovation.

Investments received by businesses and startups from high-net-worth individuals, beyond their fair market value, is taxed at 31%.

“To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing angel tax for all classes of investors,” said the finance minister during her budget speech.

This move, which addresses the key demand of the startup ecosystem, follows several attempts by the community to simplify the system. The decision "eliminates a major hurdle, making it easier and more attractive for investors to support early-stage startups," said Prashanth Prakash, a partner at venture capital firm Accel to Reuters.

What is Angel tax?

It is a 31 per cent tax imposed on investments by angel investors, majorly high-net-worth individuals who invest in business startups or small and medium-scale companies. Formally known as Section 56(2) (vii b) of the Income tax Act, it was imposed to tax funds raised by startups from angel investors, more than their fair market value, notes a report by Moneycontrol.

Startups have contested the methods used by the authorities to assess their fair market value and call it “impractical”. Last year the tax was extended to transactions involving foreign investors as well.

Union minister for railways and IT Ashwini Vaishnaw told PTI that the move will spur investment in startups. "Angel tax has been a long-standing issue. Deep tech startups had a major issue on how we do valuation. That point has been addressed with its abolition," he said at a post-budget conference.

Move welcomed

Shaadi.com founder and Shark Tank India judge Anupam Mittal welcomed the move. “LTCG has also been harmonised across pvt and public cos at 12.5%. Another shot in the arm for startup investors,” Mittal posted on X (formerly twitter).

Congress leaders P Chidambaram and Shashi Tharoor also welcomed the move saying the party had recommended the same years ago to then finance minister Arun Jaitley.

(With inputs from Reuters)