India Abolishes Angel Tax to Boost Startup Ecosystem

India’s federal government has abolished the "angel tax" for all investor classes, marking a significant win for the nation’s startup community that had long campaigned against the tax.

In her budget speech, Finance Minister Nirmala Sitharaman stated, “To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing the angel tax for all classes of investors.”

The angel tax, introduced in 2012 to combat money laundering, had been a major hurdle for early-stage companies and their investors. It taxed startup investments when valuations exceeded what tax officials considered fair market value, often clashing with investors’ more optimistic projections.

Despite attempts to simplify the tax in 2019, it continued to pose challenges. As recently as earlier this year, local tax authorities were still scrutinizing startup investments.

“This is a watershed moment in the Indian startup story. A tax on capital formation has long been used to harass startups and investors,” Siddharth Pai, co-founder and partner at venture capital fund 3one4 Capital, said.

The core issue was the differing valuation methods used by investors and tax authorities. Investors typically employed discounted cash flow methods to project future potential, whereas tax authorities focused on current worth, often much lower for early-stage startups. This discrepancy created significant obstacles for founders seeking to raise capital. For years, key figures in India’s startup ecosystem argued that the angel tax stifled essential funding for innovation.

Amit Mehra, CFO of venture capital fund Lightspeed, welcomed the tax’s abolition, noting it will reduce “significant uncertainty on taxation of investments received by startups due to the angel tax provisions.”

“The removal of the tax will foster a more supportive environment for investments in startups, fueling innovation and growth. This is crucial for startups to remain in India and thrive,” Mehra added.

Additionally, Sitharaman announced the launch of a $120 million venture capital fund to accelerate the growth of India’s space economy.