Understanding Angel Tax and Its Impact on Indian Startups

Angel tax has been a long-standing thorn in the side of Indian startups. Introduced in 2012 under the Income Tax Act, the tax was designed to prevent money laundering by taxing investments that appeared suspicious or inflated. However, what began as a regulatory tool quickly turned into a source of concern for early-stage companies trying to raise funds and scale.

At its core, angel tax applies to the capital raised by a startup when it issues shares to an Indian resident at a price higher than its fair market value. The premium received over this value is treated as income and taxed at a hefty rate of 30%. While the intention was to plug loopholes and monitor unaccounted wealth, in practice, it ended up discouraging genuine investment in new ventures.

For many startups especially those still in the early stages of building product-market fit or generating consistent revenue this tax created a significant financial burden. Receiving funding at a premium is a common and necessary practice in the startup ecosystem, reflecting investor confidence rather than suspicious intent. But with the tax treating such premiums as taxable income, startups found themselves stuck in an unfortunate bind: penalized for raising funds meant to fuel their growth.

By 2019, the backlash from entrepreneurs, investors, and industry bodies had grown too loud to ignore. The government stepped in with a series of reforms aimed at easing the pressure.

One of the most important changes was the increase in the exemption threshold. Startups that had received investments of up to INR 50 crore (raised from INR 25 crore earlier) were now exempt from angel tax, provided they also met two other criteria: they must have been incorporated within the last ten years and their annual turnover must not exceed INR 100 crore. This broader eligibility brought a large number of startups under the exemption umbrella, giving them much-needed breathing room.

Alongside this, the government introduced a dedicated grievance redressal cell under the Department for Promotion of Industry and Internal Trade (DPIIT). This move aimed to bring accountability and speed to the resolution process. Any startup facing issues related to angel tax could approach the cell, with the assurance that concerns would be addressed within 45 days a notable improvement in a system often bogged down by delays.

Another key reform was the simplification of the exemption process. Previously, startups had to approach the Central Board of Direct Taxes (CBDT) for exemption approvals, often navigating bureaucratic delays. The revised policy introduced

, allowing eligible startups to declare themselves exempt, thereby reducing dependency on paperwork and regulatory bottlenecks.

Despite these welcome changes, the shadow of angel tax hasn’t completely lifted. Many in the ecosystem continue to advocate for its complete removal, arguing that the tax, in principle, is at odds with the spirit of innovation and risk-taking that defines startups. Comparisons are often drawn with countries like the United States, where such taxation is absent, and startups enjoy far greater freedom in structuring investment deals.

Critics argue that angel tax not only creates uncertainty for investors but also undermines India’s vision of becoming a global startup hub. Investors, particularly angels who play a crucial role in nurturing young ventures, may hesitate to fund early-stage companies if their investments could attract scrutiny or result in unexpected tax liabilities.

To the government’s credit, there has been a consistent effort to minimize the disruptive effects of the tax. Exemption limits have been expanded, the process has been clarified, and there is a more nuanced understanding of the startup ecosystem within policymaking circles today than ever before. Still, the mere existence of angel tax continues to be viewed by many as a deterrent to free-flowing capital.

As India’s startup landscape matures and the country continues to position itself as a leader in innovation, the question remains: is there still a place for angel tax in this narrative? Or is it time to phase it out entirely in favor of more forward-looking, founder-friendly policies?

Only time will tell. But what’s clear is that while progress has been made, the road to a truly supportive and competitive startup environment in India is still under construction.