In its Union Budget for 2024-25, the central government,
acknowledging the negative impact of angel tax on startup funding
and investment, has announced its removal from the Indian tax
system to encourage investment, promote entrepreneurship, and
support innovation within the startup ecosystem. Given that this
tax was introduced with a specific purpose, it is important to
conceptually understand it and evaluate the impact of this
budgetary change.
Concept: Angel tax was a direct tax levied on the excess amount
of share premium over and above the fair market value
(“FMV”) of shares issued by unlisted companies
(startups/established businesses) on raising capital from
investors, known as angel investors. Angel tax was originally
applied only to investments made by residents. However, the Finance
Act 2023 broadened its scope to include non-resident investors as
well. Although a subsequent notification in 2023 exempted few
categories of investors from certain countries