The recent abolition of the angel tax in India has led to a wave of optimism among startups. Many companies are now relocating their headquarters back to India. This is due to government initiatives aimed at improving the ease of doing business.
The decision to remove the angel tax was part of the FY25 Budget. It has helped reverse the trend of startups registering abroad for better tax advantages. The Department for Promotion of Industry and Internal Trade (DPIIT) has reported an increase in the number of startups returning to the country.
Angel tax was introduced in 2012 under Section 56(2)(viib) of the Income Tax Act. It aimed to curb tax avoidance and money laundering. The tax was applied to the difference between the fair market value (FMV) of shares and the price at which closely held companies issued them.
However, this provision was often seen as a deterrent for startups. It led many to seek registration in foreign jurisdictions. The removal of angel tax has resulted in a wave of “reverse flipping.” Startups that initially registered abroad are now returning to India.
The DPIIT has indicated that this change is having a positive impact on the equity market. The Ministry of Corporate Affairs is working to speed up processes to make these transitions easier for startups. Since the launch of the Startup India initiative in 2016, the number of registered startups has grown significantly.
By the end of 2024, there were over 157,000 registered startups.
Startups thriving post angel tax abolition
In terms of funding, startups received $155 billion in 2024, up from just $8 billion in 2016.
This growth has also led to the creation of over 1.7 million jobs across the country. It shows the important role startups play in the Indian economy. Countries like Saudi Arabia have expressed interest in Indian startups.
This is particularly evident through events such as the Startup Mahakumbh. The DPIIT is actively pursuing collaborations that allow foreign sovereign pension funds to invest in Indian startups. The goal is to create a global network where startups can address international challenges.
This will enhance their visibility and potential for growth. To support manufacturing startups, the DPIIT has engaged large companies to identify products they can procure from startups. This initiative aims to create a symbiotic relationship between established firms and emerging startups.
It will encourage innovation and economic growth. Ahead of the ninth anniversary of the Startup India programme, the DPIIT is meeting with alternate investment funds (AIFs) to discuss startup funding. The meeting will focus on capital mobilisation and funding opportunities for startups in smaller cities.
Around 75 AIFs are expected to participate, showing the growing interest in supporting the startup ecosystem in India. The Centre’s Fund of Funds Scheme (FFS) is a key part of this initiative. It provides financial backing to Sebi-registered AIFs, which in turn invest in startups.
