In a fillip to the startup ecosystem, Union Finance Minister Nirmala Sitharaman on Tuesday announced the abolition of the much-contested angel tax during her Budget 2024 speech. The move will reduce the tax burden on startups that are looking to raise early funds via venture capital or private equity.
The announcement comes on the back of strong demands from various stakeholders of the startup sector asking for the removal of the contentious angel tax.
The move is expected to act as a shot in the arm for startups in the initial stages of fundraising. “This is a huge relief for Indian companies, specifically the startups. It is delight for investors and PE/VC (private equity and venture capital) funds supporting Indian companies,” said Lokesh Shah, Partner, IndusLaw.
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Angel tax is levied by the government on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value. As per Section 56(2) VII B of the Income Tax Act, any premium received on the sale of shares to a foreign investor is to be considered as income and taxed under the head “income from other sources”.
In April 2018, the government exempted startups, through a notification, from paying Angel Tax in specified scenarios where the aggregate amount of paid-up share capital and share premium of a DPIIT-recognised startup does not exceed Rs 25 crore, after the proposed issue of shares.
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