From Compliance to Innovation: A Shift That Empowers Startups

Now that all the noise around the tax exemption for incomes up to Rs 12 lakh is settling down, it is perhaps time to take a closer look at the other commitments the Union Budget had laid out earlier this month, particularly for India’s burgeoning startup economy. The finance minister indicated a significant shift in the current regime’s approach towards emerging enterprises and innovation-led businesses— a much-needed move. Routinely facing hurdles in a compliance-heavy environment, the start-up ecosystem can finally embrace the Government’s innovation-first outlook. The focus is now on fostering innovation, easing financial constraints, and making India a hub for entrepreneurship. With initiatives ranging from tax reliefs to targeted funding for emerging sectors, the budget presents a vision where startups are not just regulated but actively encouraged to thrive.

Capital Infusion for Startups

One of the standout announcements is the ₹10,000 crore Fund of Funds (FoF), aimed at boosting investments in startups. Traditional investment models invest directly in individual companies. However, an FoF pools resources to invest in other venture capital or private equity funds, thereby providing a multiplier effect on capital infusion for startups.

Additionally, this year’s budget also doubles the availability of startup loans, increasing the limit from ₹10 crore to ₹20 crore across 27 critical sectors, with a lower guarantee fee of 1 per cent — a crucial step in addressing liquidity challenges.

The funding for Indian startups has oscillated over the few years. While the period of January to November in 2022 saw startups raise $20.2 billion, the figures dropped by 66 per cent in 2023 – securing only $6.9 billion. Even as 2024 saw a resurgence with the startups raising $12 billion in 2024, the Union Budget interventions will serve as a steadying hand for the ecosystem.

Keeping Up with the AI Race

The conversation around startups will remain incomplete without a mention of Artificial Intelligence (AI). With DeepSeek sending ripples around the globe just days before the Union Budget, India was quick to throw its hat in the ring, with the Minister of Electronics & Information Technology, announcing our very own Open-Source AI model. The minister went on to add that DeepSeek will be tested on Indian servers before India develops its own AI model.

Recognising the strategic importance of deep-tech and AI startups, the government has proposed a Deep Tech Fund of Funds. While specific details are awaited, this fund is expected to support private sector R&D and nurture next-generation startups. Bolstering this fund is the announcement of a ₹500 crore Centre of Excellence in AI for Education.

A global arms race of sorts has been shaping up in AI. For India to stay relevant in this era of tech diplomacy, it will have to establish its credibility beyond the “supplier of techies” image. In the near future, it will only be a few countries who will set the narrative on global AI adoption and collaboration. For India to secure its place, it will have to foster local innovation and the Finance Minister’s budget announcements will ensure that Indian startups remain competitive in cutting-edge technology development.

Strengthening Industrial Backbone

The Government continued to push for adoption of clean technology, exempting 35 additional capital goods from customs duty, which will directly support EV battery and mobile phone battery manufacturing. This, coupled with zero customs duty on lithium, cobalt, and nickel for EV batteries, will significantly lower production costs for startups in the sector. Moreover, increased funding for the PM E-DRIVE scheme (going from Rs 1,871 crore last year to Rs 4,000 crore) and other electric vehicle manufacturing initiatives further reinforce the commitment to clean-tech innovation.

These startup-friendly measures extend beyond tech-heavy sectors. The expansion of the National Action Plan for Toys will strengthen India’s domestic toy manufacturing industry, while the UDAN scheme expansion aims to unlock new opportunities for travel startups by increasing connectivity across 120 new destinations. In a major push for inclusivity, ₹2 crore loans for 5 lakh first-time women entrepreneurs will reshape India's business landscape, ensuring equitable access to financial resources.

Reshaping Regulatory Landscape

The Union Budget 2025 also introduces significant tax reforms to reduce burdens on startups. The three-year tax exemption for startups under Section 80-IAC (startups can claim 100% exemption from taxation of profits) has been extended to five years, providing long term financial relief. Additionally, clarity on capital gains taxation for Alternative Investment

Funds (AIFs) ensures greater investor confidence, while the simplification of the 64-year-old Income Tax Act promises to reduce compliance complexities. These measures aim to make tax structures more predictable and business-friendly.

A Push, But Not Going the Distance

Beyond the obvious support through Ease of Doing Business push, like infrastructure development, public-private partnerships, ease of compliance, this Union Budget is focused on creating a more stable foundation for fostering innovation in the startup ecosystem. However, there are certain direct interventions that remain missing from the Budget. Even with the IndiaAI Mission announcement a few days ago, the Budget itself has nothing specific to offer on direct incentives to AI and semiconductor manufacturing. Moreover, cyber security is a critical infrastructure for the ecosystem, which did not find an explicit mention in the Budget. These structural gaps will have to be addressed, if India is to compete in the global tech markets.

The shift from stringent compliance to an innovation-first ecosystem reflects the Government’s commitment to making India a global startup powerhouse. Although many other challenges around ease of doing business and indirect taxation for startups remain with the GST Council (jointly managed by the Centre and state governments), this Union Budget had come as a crucial instrument in shaping the broader economic and policy landscape. The road ahead depends on effective implementation, but the foundation has been laid for a more dynamic, entrepreneurial India.