Budget 2024: Nirmala Sitharaman Abolishes Angel Tax Aiming To Bolster Start-Ups

As a move to pave path for more startup investments in the country, Finance Minister Nirmala Sitharaman announced that angel tax will be abolished for all classes of investors. She made the announcement during the 2024 Union Budget.

The new announcement might make it easy for the start-ups which often grapples with the funds and find the angel tax as a hefty burden. It is expected to benefit the entire ecosystem of the start-ups, and could make India a global innovation hub.

Angel tax is the tax imposed on the capital raised via the issue of shares by unlisted companies from an Indian investor. If the share price of the issued shares is seen in excess of the fair market value of the company, the excess shares is considered as the income, and therefore is taxed accordingly.

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Reportedly, angel tax is a provision under Section 56(2) (viib) of the Income Tax Act, 1961. The section essentially treats the investments received by the startups from external investors as “income from other sources”, and taxes it at a rate of 30%.

It has been tormenting the start-ups. Any premium paid over the “fair market value” of shares are levied with tax. This often led to disagreements on valuation between start-ups and tax authorities.

The additional tax liability often discouraged investments, and hindered the innovations and growth the government actually aims to foster in the country.

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Angel tax was originally introduced in 2012, as an anti-abusive measure to prevent money laundering. It mandated that the start-up’s fundraise could be taxed if the valuation is more than the fair value of the shares – as determined by a merchant banker. Investors and start-ups raised concerns over the years about even the genuine investments being troubled by the move.