Angel Tax Abolished in India’s 2024 Budget: What Startups Need to Know

Introduction

One of the critical features of the 2024 -25 budget was the abolition of the angel tax. Nirmala Sitharaman, Minister of Finance and Corporation of India, since 2019, made the declaration of abolishment of angel tax. It was mainly aimed at strengthening the Indian economy and boosting startups. 

What was angel tax?

Angel tax is explained under the Income Tax Act, 1961, section 56(2) vii. The tax imposed by the government on the capital raised by unlisted companies via the issue of shares to investors. This was introduced in India in 2012, as per the Finance Act, 2012 in the Income Tax Act. Startups and unlisted companies receive funding from angel investors, and if it becomes more than fair market value, they have to pay tax. 

Angel tax rate 

Angel tax was introduced by Pranab Mukhrejee; the income tax was levied at the rate of 30.6 % while issuing shares to an angel investor more than fair market value by unlisted companies like startups.

Exemption Conditions for Angel Tax

  • Must registered under the Department for Promotion of Industry and Internal Trade (DPIIT) 
  • The total paid-up capital of the startup should be at most Rs 25 crores. However, the calculation of the paid-up capital shall not include the consideration received with respect to shares issued to a non-resident or venture capital fund and a venture capital company.
  • A certified merchant valuer must evaluate fair market value.
  • The unlisted or startup company must have the approval of 8 members of the interministerial board for exemption. 
  • Some conditions are put forth on startups: should not invest in the capital contribution of any other entity, transport costing more than ten lakhs, building, land, jewellery, and archaeological collections on prescribed limits for a period of seven years of issuing the shares.

Angel Tax Abolishment 

India is now more friendly toward startups; angel tax posed significant challenges that affected our country’s global level performance. Lobbying of startup groups was also in the picture by putting this tax hindrance, aftermuch serious of problems, the Union Budget 2024 -2025 abolished the angel tax. The objective behind angel  tax:

  • Stop money laundering 
  • Promote transparency
  • Fund for government expenditure

From the introduction itself, this tax imposition faced many criticisms. Many changes were also introduced at last 2024. It abolished 

India had a well-structured tax law, but the angel tax started to affect the new companies and startups in their growth and foreign investors. Due to increased requests and concerns from startups, the government has made some relaxations. 

Conclusion

In today’s time, a country can’t be isolated from others; it is the era of international trade and business. At such times, barriers to trade and investment from foreign countries affect our economy. Angel tax was such a barrier to foreign investors. This also affected budding entrepreneurs and startups.  Now, India is growing fast in startups, and the government has put forth many initiatives for the growth of startups; the abolishment of the angel tax is a catalyst for it.

References

  • Income Tax Act, 1961
  • Finance Act 
  • Budget Report 2024

Join the Legal Community!

Connect with fellow lawyers, law students, and legal professionals on our platform. Share updates, find job opportunities, enroll in courses, and collaborate on legal projects. Enhance your career and stay informed in the ever-evolving legal field. Join us today!”

Quick Links