Budget 2025: Sovereign Funds, Tax Relief on ESOPs, Capital Gains Reform on Investors’ Wishlist

While the central government has been supporting the start-up ecosystem with various schemes and funds, start-up investors emphasize the need for continued backing including tax relief on ESOPs, sovereign funds, and reducing barriers for foreign investments. With global competitiveness at stake, there is a strong call for more funding mechanisms, enhanced research and development (R&D) incentives, and policy changes that have the potential to unlock institutional capital.

The government has already announced a Rs 10,000 crore VC fund for space start-ups in the previous budget. Similarly, the centre must look for ways to unlock more capital through various pools within the government because the country now has a fair amount of domestic capital available, said Archana Jahagirdhar, Rukam Capital founder and Managing Partner.

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Tax Relief on ESOPs, Less Barriers for Foreign Capital

Speaking about the (Employee Stock Ownership Plan) ESOPs, she suggested, “Employees who join early and take risks should be rewarded, not taxed when the ESOP is exercised, as opposed to when there is a sale of those equities. It would be fairer to tax ESOPs only when the shares are sold, aligning the tax obligation with the employee’s financial ability to pay.”

Kushal Bhagia, founder and General Partner (GP) at All In Capital believes that the government should reduce entry barriers to attract foreign investment in India. Currently, foreign investors have to follow a long process which includes, procuring a PAN, sending notarised documents, getting a DMAT account, etc., before starting putting their money into the country.

“Make investing outside India allowed for (Alternate Investment Funds) AIFs without any permission from SEBI or RBI. Many promising Indian founders selling into the north American market incorporate their companies outside India as well and there’s no reason Indian capital shouldn’t be available to them. They all typically anyways setup a large part of their operations in India,” he said.

Additionally, Bhagia stated that government banks, insurance companies  like LIC and even large private sector banks are sitting on large pools of capital that are not flowing into the innovation economy.

“If the government could incentivise them to invest a small portion of their pools into VC funds or startups, we would see massive downstream effects in terms of more company formation, technological innovation and more employment generation,” he added.

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Demand for Capital Gains Tax Reform

He even lauded the government’s progressive initiatives, such as aligning capital gains tax for private investments with public investments, calling it a major stimulant to VC industry in the United States during the 80s.

According to Bhagia, reducing the capital gains tax 28% to 20% under the Economic Recovery Tax Act of 1981 significantly boosted venture capital investments in the US, increasing from $0.5 billion in 1978 to $4.2 billion by 1983. . The policy also led to a 50% increase in capital gains tax revenue, from $12.5 billion in 1980 to over $18 billion in 1983.

“Today VC-backed companies make up more than 40% of US market capitalisation and we can expect a similar theme to play out in India. More sector-focused funds for industries requiring high R&D expenses and capex will help more IPs to come out of India and lead to globally competitive companies,” the All In Capital founder expects from the upcoming budget to be presented by Finance Minister Nirmala Sitharaman on February 1.

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In a nutshell, the government can attract both domestic and global capital by introducing progressive tax reforms and investment-friendly policies, according to Navin Honagudi, Managing Partner at Elev8 Venture Partners. Besides this, Cactus Partners’ GP Amit Sharma also calls for rationalising GST on fund management fees.

The venture capital investments in India surged in 2024, reaching $16.77 billion across  888 deals from January to November --- around 14% increase in funding value, according to the India Brand Equity Foundation (IBEF) data. The data highlights a positive growth trend in India’s venture capital sector, indicating increasing investor confidence in the Indian market.