Budget 2026 has announced major tax and compliance relief measures for startups and MSME founders, extending the profit-linked tax holiday for eligible startups and permanently abolishing angel tax on equity investments. The measures are aimed at improving access to early-stage funding, reducing valuation-related tax disputes and lowering compliance costs for growing enterprises.
Five-year extension of startup tax holiday
The Budget extends the 100 percent profit-linked deduction available to eligible startups under Section 80-IAC for a further five years.
Startups incorporated on or after April 2016 and recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) will continue to be eligible for full tax deduction on profits for the prescribed period.
For deep-technology startups operating in areas such as artificial intelligence, biotechnology and semiconductors, the total tax holiday window has been extended to 15 years, compared to the earlier 10-year limit. The extension allows startups to claim 100 percent profit deduction for any eligible block within the permitted period, without a minimum turnover requirement.
Angel tax abolished permanently
Budget 2026 has permanently removed angel tax on share premium received by startups and MSMEs. The provision under Section 56(2)(viib), which earlier taxed share premium received above prescribed fair value, has been scrapped. Under the earlier framework, startups were required to justify valuations through discounted cash flow models and were exposed to tax at around 30 percent on disputed premiums.
With the abolition of angel tax, equity investments received by startups will no longer attract tax on valuation differences. The change applies to investments from both resident and non-resident investors.
The removal of angel tax eliminates one of the most common friction points in early-stage fundraising, particularly for first-time founders and MSMEs raising angel and seed capital.
TDS and TCS rationalisation for startups and digital sellers
Budget 2026 has also introduced a set of TDS and TCS rationalisation measures relevant for startups and MSME founders.
TDS on certain cross-border payments made by startups for technology services and royalty has been reduced to 1 percent. The threshold for deduction of tax on professional and technical services has been raised to an annual limit of Rs 50 lakh. For e-commerce transactions, tax collected at source has been rationalised to a flat 2 percent rate, replacing multiple effective deductions faced by sellers operating across platforms.
Lower compliance burden for founders
The combination of profit tax exemption, removal of angel tax and simplified TDS and TCS is expected to significantly reduce compliance and documentation requirements for startups.
Earlier, startups raising equity were required to obtain valuation reports, undergo scrutiny on share premium and manage advance tax exposure arising from disputed valuations. Under the revised framework, recognised startups are required to maintain DPIIT recognition and file regular income tax returns to claim the profit-linked deduction.
Impact on startup funding and scale-up
The tax and compliance changes are expected to improve fundraising conditions for early-stage and growth-stage enterprises, including SaaS startups, digital commerce brands, manufacturing MSMEs undertaking technology upgrades and deep-technology ventures working on product development.
By removing taxation on equity premiums and extending the profit holiday window, the Budget aims to reduce valuation haircuts and make India-based startups more competitive for both domestic and international investors.
Conclusion
Budget 2026 marks a significant shift in startup taxation policy by extending the profit-linked tax holiday and permanently abolishing angel tax. Alongside simplified TDS and TCS provisions, the measures reduce regulatory friction for MSME founders and startups and are intended to improve access to equity funding and long-term financial planning for emerging enterprises.