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Union Budget 2024: Angel tax abolished to boost startup

NEW DELHI: Finance Minister Nirmala Sitharaman in her speech presenting Budget 2024, abolished Angel tax to boost startup on July 23.

Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen as more than the fair market value of the company. The excess realization is considered as income and is taxed accordingly.

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“To bolster the Indian startup ecosystem, boost the entrepreneurial spirit and support innovation, I propose to abolish the Angel tax for all classes of investors. Corporate tax rate to be reduced on foreign companies from 40 to 35 per cent,” said Sitharaman.

Investors in early-stage startups are often referred to as angel investors, hence the name ‘angel tax’. Angel tax was first introduced in the Union Budget 2012 by then finance minister Pranab Mukherjee under the UPA-II regime. The tax is a provision under Section 56(2)(viib) of the Income Tax Act, 1961. It essentially treats the investment received by startups from external investors as “income from other sources” and taxes it at a rate of 30%. The rule is applied when a closely held company, such as a startup, issues shares (including preference shares) at a valuation higher than the fair market value. Tax authorities treat a startup’s excess amount as income from other sources

She also said that the corporate tax rate on foreign companies will be reduced to 35%.

This was the first Union Budget of the Modi 3.0 government and Sitharaman’s seventh consecutive budget during the Monsoon Session of Parliament.

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