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Five ways Budget 2024 impacts the Indian startup ecosystem

Stakeholders in the Indian startup ecosystem believe the Union Budget announcements on taxation for unlisted securities and thematic funds will have a long-term impact on the domestic startup ecosystem.

Five ways Budget 2024 impacts the Indian startup ecosystem

Tuesday July 23, 2024 , 4 min Read

The latest Budget presented by Finance Minister Nirmala Sitharaman may not have mentioned the word "startups" as many times as she did in the previous ones, but it addressed many long-pending demands of the founders and investors.

Here are the key budget announcements—including the abolition of the angel tax—which will directly impact Indian startups and domestic investment firms. 

Angel tax

Finance Minister Nirmala Sitharaman, in her seventh Budget speech, announced the abolition of angel tax in all shapes and forms, bringing a much-needed respite to Indian startups.

Effective April 1, 2024, startups that have issued shares from the date will be exempt from taxation on the investments received in excess of the fair market value.

“This will open up domestic capital for Indian startups as an asset class,” Padmaja Ruparel, Co-founder of Indian Angel Network, told YourStory

The move will also bring down the burden of compliance on startups, which had to seek two valuation reports—one to determine FEMA valuation, in the case of non-resident investors, and a tax fair market (FMV) valuation. The FEMA valuation cannot exceed the tax FMV by over 10%. 

Angel tax, a niggling issue for Indian startups for over a decade, refers to Section 56 (2) (vii b) of the Income Tax Act 1961. It is levied on capital received by an unlisted Indian company over the fair market value. The investment in excess of fair market value is taxed as "income from other sources" at 30.9%. 

Previously, the Department of Industry and Internal Trade (DPIIT) had issued a notification, exempting DPIIT-registered startups along with certain criteria, including a cap of Rs 10 crore on paid-up share capital and share premium of the startup seeking exemption and minimum average returned income for angel investors. 

Long-term capital gains tax

The long-term gains on financial and non-financial assets will now attract a taxation rate of 12.5%. This brings down the taxation on gains from sales of shares in startups and unlisted entities by nearly 8%—bringing parity with listed shares. 

“This will unlock domestic capital from family offices and others for the AIF (Alternative Investment Funds) category. As a venture fund, we invest for the long term, and the clause frees up a large portion of the funds raised for investment rather than paying taxes,” Anirudh Damani, Managing Partner at Artha Venture Fund, told YourStory.

While this helps domestic investors, the loss of indexation benefits could offset the lower tax rate advantage in certain cases, said Anshul Khemuka, Partner at law firm Khaitan & Co.

“The change in long-term capital gain tax will benefit an employee at a startup holding shares in the company as part of ESOPs and looking to exit pre-IPO through secondaries,” said Khemuka. 

Taxing buyback of shares in the hands of recipients

The proposal to tax income received on share buybacks at the end of the recipients will directly impact startup employees who hold shares as part of the ESOP plan in a company. 

“As buyback will now be considered a deemed dividend, it will now be taxed as per employee’s respective slab rates. Earlier, it was taxable in the hands of the company at a flat rate of 20% (plus surcharge and ed cess),” Anish Shah, Partner, M&A - Tax and Regulatory Services at BDO India, told YourStory

He added that the amendment will impact startups' ability to repatriate funds to their investors in a tax-efficient manner. 

Taxing the buyback of shares at the hands of the recipient makes it less attractive for resident shareholders, including those with startup ESOPs. "Employees with ESOPs will have to pay the tax on dividends at the rate applicable as per income tax slab. Non-resident shareholders could however be looking to claim treaty benefits," said Khemuka of Khaitan & Co.

Spacetech on the rise

Picking on the demand for thematic funds to encourage deep tech innovation in the country, the Finance Minister announced a venture capital fund with a corpus of Rs 1,000 crore to expand the space economy over the next 10 years.

The announcement lines up with the government’s plan to open up the space sector to private players and encourage Foreign Direct Investment (FDI) into the sector.

DPI applications for key sectors

The Finance Minister also proposed the development of digital public infrastructure applications for opening up productivity and opportunity across areas of credit, ecommerce, education, health, law and justice, logistics, MSME, service delivery, and urban governance.

The Budget also proposed DPI for agriculture for crop surveys across 400 districts.


Edited by Suman Singh