After the funding winter, India’s startup ecosystem has settled into what investors increasingly describe as a “new normal”. In 2025, private funding stabilised but still remained restrained, with startups raising about $11 Bn across 936 deals, an 8% decline year-on-year and a fraction of the capital deployed during the peak years of 2021 and 2022.

As startups operate in a more disciplined funding environment – shaped by tighter capital, slower scale-up cycles, and rising public market scrutiny – policy clarity has become increasingly consequential.

Taxation and regulatory certainty now play a larger role in shaping fundraising outcomes, employee compensation structures, and the viability of research-led businesses than they did during the capital-abundant years.

It is against this backdrop that the startup ecosystem is looking at the upcoming Union Budget 2026-27, which finance minister Nirmala Sitharaman will present on February 1 (Sunday).

Rather than sweeping incentives, founders and investors want the finance minister to address unresolved issues around angel tax and provide relief on long-standing demands for a relook at ESOP structure, areas that can influence the ecosystem’s next phase of growth.

Angel Tax: The Lingering Impact Of A Rolled-Back Law

The Centre abolished the controversial angel tax provisions for startups in July 2024. Introduced to curb money laundering, under section 56(2) of the Income-tax Act,1961, the provision allowed tax authorities to treat capital raised by startups at a premium over fair market value as taxable income. The provision quickly became one of the most feared regulatory hurdles by startup founders.

While the startup ecosystem celebrated the decision to remove angel tax, the ghost of the dreaded provision continues to haunt the world’s third-largest startup ecosystem.

“Since November 1, 2019, there have been no hearings. We’ve submitted all the documentation, yet no action has been taken so far. The department is clueless on what to do,” Pushpinder Singh, founder and CEO of TravelKhana, told Inc42 Media, highlighting the need to address the pending angel tax cases.

According to Singh, the I-T department has already recovered INR 35 Lakh from his startup’s bank account, while simultaneously imposing a penalty of INR 2.3 Cr. The demand........

© Inc42