Union Budget 2024: What Is Angel Tax? All Investor Classes Exempted From This Tax

The Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman, announced the removal of ‘angel tax’ for all types of investors during her Union Budget 2024-25 presentation in Parliament. This decision is intended to strengthen the Indian start-up ecosystem, encourage entrepreneurship, and support innovation. She also proposed lowering the corporate tax rate for foreign companies from 40% to 35% to attract more foreign investment for India’s development needs.  To enhance the Indian startup ecosystem, the government has announced the removal of the angel tax for all types of investors.

Angel tax, which was applied to the capital raised through the issuance of shares by unlisted companies from Indian investors, considered any excess over the fair market value of shares as taxable income.

“To strengthen the Indian startup ecosystem, foster entrepreneurial spirit, and support innovation, I propose abolishing the so-called angel tax for all investor categories,” Finance Minister Nirmala Sitharaman declared in her Union Budget 2024 speech.

Additionally, she revealed adjustments to tax rates for e-commerce entities and certain financial instruments concerning long-term capital gains. Long-term gains on both financial and non-financial assets will be taxed at 12.5%, while the TDS rate for e-commerce operators will be reduced from 1% to 0.1%.

The Indian startup scene is vibrant with innovation and ambition. To further stimulate this growth, the government provides various incentives, though the “Angel Tax” has often been a contentious issue. Finance Minister Nirmala Sitharaman has now proposed its elimination.

Despite its name, Angel Tax is not a tax incentive. It’s a provision under Section 56(2)(viib) of the Income Tax Act, 1961, that treats investments received by startups from external investors as “income from other sources,” taxing it at 30%.

Smt. Sitharaman revealed plans to introduce a vision and strategy document for the financial sector. This document aims to address the financing requirements of the economy and enhance the sector’s size, capacity, and skillset over the next five years. It will provide guidance for the government, regulators, financial institutions, and market participants.

Additionally, the Finance Minister proposed the development of a taxonomy for climate finance to improve capital availability for climate adaptation and mitigation efforts, aiding in India’s green transition and climate commitments. The government will seek legislative approval to create a flexible and efficient financing mechanism for leasing aircraft and ships, as well as pooled private equity funds through a ‘variable company structure,’ as mentioned by Smt. Sitharaman.

 

To streamline foreign direct investments and promote the use of the Indian Rupee for overseas investments, the Finance Minister announced plans to simplify the rules and regulations governing Foreign Direct Investment and Overseas Investments. In support of the diamond cutting and polishing industry, which provides many skilled jobs, she proposed safe harbor rates for foreign mining companies selling raw diamonds.

Finally, Smt. Sitharaman suggested a simplified tax regime for foreign shipping companies operating domestic cruises, aiming to unlock the potential of cruise tourism and boost this employment-generating sector in the country.

Also read: Budget 2024 Live Updates: Nirmala Sitharaman Set to Present Budget with Focus on Job Creation and Tax Rate Cuts