Budget 2024-25: Angel Tax to be abolished, giving a big boost to startups
The Angel Tax was introduced in 2012 primarily to prevent money-laundering but it often acted as a turn-off for budding entrepreneurs and angel investors too
Union Finance Minister Nirmala Sitharaman, while presenting the Union Budget 2024-25 in Lok Sabha on Tuesday (July 23), announced the removal of angel tax for all investors.
“I propose to abolish the Angel tax for all classes of investors in startups,” Sitharaman said. The move is likely to come as a big boost to startups.
What is Angel Tax?
The Angel Tax was introduced in 2012 primarily to prevent money-laundering. To put it very simply, when an external investor (called angel investor) invests money in a startup that is above the company’s market value, the extra amount invites a whopping 30 per cent tax called the Angel Tax.
Under Section 56 of the Income Tax Act, 1961, such investment received by startups is treated as “income from other sources”. However, it has been a thorn in the flesh for startups, and industry experts have sought its removal for long to provide a more supportive environment for budding entrepreneurs.
Who will benefit?
Startups are often short of funds, and the whopping 30 per cent tax burden on any extra fund they can manage to bag from an angel investor is often too demanding on them. The valuation of a startup can also be a subject of disagreement between the owner and tax authorities.
In short, this tax was often a turn-off for budding entrepreneurs. Its removal will not only encourage startups but also encourage more angel investors to invest in startups.
Though the government had earlier introduced certain exemptions and increased the investment limit, its removal altogether is expected to provide a more conducive environment for startups and angel investment.