Union Budget 2024: FM Nirmala Sitharaman junks angel tax, a shot in the arm for Startup Inc

Angel Tax: Finance Minister Nirmala Sitharaman's seventh Union Budget has brought a lot of cheer to the startup community. Entrepreneurs and startup stakeholders hailed the FM's move to abolish the dreaded Angel Tax - first introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee under the UPA-II regime to arrest money-laundering - something that the industry has been long clamouring for.?

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The Government's proposal to abolish the angel tax on all asset classes comes as a shot in the arm to the startup ecosystem which has been urging for its withdrawal repeatedly.?

While presenting the Union Budget for 2024-25, the Finance Minister announced the abolition to boost Startup Inc. "First of all, to bolster the Indian startup ecosystem, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors," she said to a thunderous applause in Parliament.

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Despite being political opponents, former finance minister P Chidambaram gave a thumbs-up to Nirmala Sitharaman's announcement. In a tweet right after the Budget was tabled, the veteran Congress leader said that he was "pleased" with the move. "Congress has pleaded for the abolition for many years and most recently in the Congress Manifesto on page 31," he wrote in his tweet.

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Snapdeal co-founder Kunal Bahl also lauded the move, calling it fantastic!?

?Many techpreneurs and watchers on social media appreciated the move.? ?

What is angel tax??

Angel tax refers to the income tax levied by the government on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value. As this tax impacts angel investment considerably, it has been named such.?

Under Section 56(2) VII B of the Income Tax Act, the premium received on the sale of shares to a foreign investor is considered “income from other sources” and therefore, taxed accordingly.?

When was angel tax introduced and why??

Angel tax can be traced back to 2012 when it was introduced by the finance minister Pranab Mukherjee in the Union Budget. The move, at the time, was carried out to stem the laundering of funds in the UPA-II coalition.?

In 2018, the NDA government issued a notification to provide exemption to startups under Section 56 of the Income Tax Act in cases where the total investment including funding from angel investors did not exceed Rs 10 crore. To avail the exemption, startups had to get approval from an inter-ministerial board and a certificate of valuation from a merchant banker.?

The Department for Promotion of Industry and Internal Trade (DPIIT), has welcomed the move and said that this lend impetus to over 1,41,000 DPIIT-registered startups. Many have said that the high tax rates were deterring investors from pooling in funds. The amendments to the angel tax regime will be made effective from April 1, 2025, and will be applicable from assessment year 2025-26.

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