What Impact Will The Proposed Tax Reforms Have On Startups?

Finance minister Nirmala Sitharaman presented the Union Budget 2025, introducing a significant tax overhaul.

SUMMARY

One of the key announcements of the budget was the introduction of a new income tax bill, which aims to simplify compliance and reduce litigation

The proposed legislation is expected to cut down tax law chapters and word count by nearly half, making the tax system easier to navigate

The budget also addressed a long-standing concern for venture capitalists and private equity firms by proposing tax certainty for Category I and II AIFs on capital gains from securities

Finance minister Nirmala Sitharaman presented the Union Budget 2025, introducing a significant tax overhaul. One of the key announcements was the introduction of a new income tax bill aimed at simplifying compliance and reducing litigation. The proposed legislation will cut down tax law chapters and word count by nearly half, making the tax system easier to navigate.

“Over the past 10 years, our government has introduced multiple tax reforms, such as faceless assessments, faster refunds, and the Vivad se Vishwas scheme. In continuation, I reaffirm our commitment to ‘trust first, scrutinise later,’ and I propose to introduce the new income tax bill next week,” Sitharaman said in her budget speech.

The upcoming bill is expected to replace the 64-year-old Income Tax Act, enhancing transparency and easing tax compliance. While the budget did not introduce direct changes to startup tax regimes, it increased the income tax exemption limit to INR 12.75 Lakh and addressed tax concerns for Alternative Investment Funds (AIFs).

Meanwhile, industry leaders have hailed the increased exemption limit, citing its potential to stimulate consumer spending and drive economic momentum.

“It unlocks much-needed disposable income, fuels consumption, and benefits consumer startups while improving tax compliance. This budget isn’t just about immediate fiscal allocations; it lays the groundwork for a ‘Viksit Bharat’ by addressing systemic inefficiencies and positioning India for long-term economic leadership,” said Anirudh Damani, managing partner at Artha Venture Fund.

With higher disposable income, startups in fintech, ecommerce, and direct-to-consumer (D2C) segments are likely to benefit from increased demand.

Tax Certainty For Alternative Investment Funds (AIFs)

The budget addressed a long-standing concern for venture capitalists and private equity firms by proposing tax certainty for Category I and II AIFs on capital gains from securities.

“Category I and Category II AIFs are undertaking investments in infrastructure and other such sectors. I propose to provide certainty of taxation to these entities on the gains from securities,” announced Sitharaman.

Industry experts view this as a much-needed reform that will attract global investors by eliminating tax ambiguity.

“This reform provides much-needed clarity on capital gains taxation for venture capital and private equity funds. It acknowledges the role of AIFs in infrastructure and high-growth sectors. Tax uncertainty has long been a deterrent for global investors, and resolving this issue will attract more foreign capital,” Ashwin Raghuraman, the cofounder and partner at Bharat Innovation Fund said.

Further, Raghuraman highlighted the need for tax relief, not just certainty. The key issue, he argued, is distinguishing private equity investments from public market investments.

He is of the view that public market investors, including banks, contribute to the economy, but private equity plays a crucial role in developing companies, infrastructure, and high-growth sectors, particularly in the startup ecosystem.

According to him, startups drive job creation and innovation in critical areas that have long been overlooked. “Now that their contributions are being acknowledged, can private equity investors be granted a different capital gains tax rate, recognising their unique role in fostering economic growth?” Raghuraman asked.

Proposal For Decriminalisation Of TCS Delays & Enhanced LRS Threshold

Another notable reform was the decriminalisation of Tax Collected at Source (TCS) delays and the increase in the Liberalised Remittance Scheme (LRS) threshold from INR 7 Lakh to INR 10 Lakh, with educational loans now exempt from TCS requirements.

“The shift from tax enforcement to tax enablement fosters a more startup-friendly environment. These measures will ease capital movement, enhance compliance, and reduce friction for businesses and individuals,” noted Anirudh Damani.

For startups with international operations, this means greater flexibility in managing cross-border transactions, vendor payments, and overseas investments.

Five-Year Tax Benefit Extension For Startups

The budget also proposed a five-year extension of tax benefits under Section 80-IAC, making startups incorporated before April 1, 2030, eligible for the scheme.

However, industry leaders believe more structural reforms are needed.

“Many deeptech and capital-intensive startups require a longer gestation period before turning profitable. Extending the eligibility period from 10 to 15 years would provide crucial support for these ventures,” said Anand Agrawal, the cofounder and CPTO at Credgenics.

Overall, the Union Budget 2025 marks a shift in India’s tax policy, moving from strict enforcement to an enabling, innovation-first approach.

With reduced compliance burdens, targeted tax incentives, and simplified capital gains structures, the government aims to create a startup-friendly environment that encourages risk-taking and investment.