From taxes to FDI rules – how India’s budget affects the Gulf

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• ‘Angel tax’ abolished
• Relaxation of FDI rules
• Capital gains tax rises

Prime Minister Narendra Modi’s first budget of his third term brings welcome news for international investors but mixed outcomes for non-resident Indians.

Notable initiatives include abolishing the contentious “angel tax”, simplifying foreign direct investment (FDI) rules, increasing capital gains taxes and cutting gold import duties.

Angel tax abolition: relief comes too late

India’s finance minister Nirmala Sitharaman announced the removal of the angel tax, which had been heavily criticised for treating early-stage funding raised by Indian startups as taxable income liable to a rate of 30 percent.

This policy had complicated fundraising, particularly from Gulf-based investors not used to tax procedures, who struggled with proving funding sources.

“Several Gulf investors retreated from angel investments in recent years to avoid such queries,” says Ivan Fernandes, an angel investor based in Dubai.

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Prashant Gulati, a Dubai-based angel and early-stage investor in startups in India, says this week’s move has come too late.

“Years of losing real angel support, negative messaging, tax notice hell, and the destruction of startup opportunities – patting your back by removing it now is insufficient,” he says. 

Simplifying FDI rules amid declining inflows

Sitharaman promised in her speech that “the rules and regulations for foreign direct investment and overseas investments will be simplified”.

While Sitharaman did not outline specifics, Vijay Valecha, chief investment officer at UAE broker Century Financial, says current sector-specific caps, intended to protect domestic industries, can deter potential investors and should be addressed.

“For instance, sectors like broadcasting and power exchanges have a 49 percent cap on FDI,” he says. “Easing these caps exemplifies how rules can be relaxed to encourage more investment.”

Altaf Hussain/Reuters

Sanjeev Dutta, CEO of the UAE-India Business Council – UAE Chapter, stresses the importance of the simplification of FDI rules, especially for sovereign wealth funds.

“Clearer regulations would enhance transparency and ease of investment, promoting greater participation in sectors like infrastructure and technology,” he says.

The changes come after a 3.5 percent fall in FDI inflows into India in 2024, from $46 billion last year to $44.5 billion.

An executive at the Abu Dhabi state fund Mubadala said in May that reducing red tape was critical to making India more attractive to global investors.

Achieving the target of $75 billion of UAE investment in India, discussed since 2015, remains a challenge. So far it stands at $15.3 billion.

Manoj Aheeray, Global Partner at 100 Unicorns, expects operational formalities for foreign investors to be simplified. 

“Specifically, rules related to accessing tax treaty benefits are likely to be simplified, making it easier for Gulf investors, including SWFs, to navigate and benefit from tax treaties when investing in India,” he says.

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Fernandes argues that Gulf sovereign wealth funds receive preferential treatment in India, compared to other forms of FDI, including tax-free dividends and capital gains in approved investments. 

“The government needs to provide the same confidence in smaller investors that they are providing to the large SWFs so that investment is available at the bottom of the pyramid, not just the big unicorns which SWFs are interested in,” he says.

To make India more appealing to investors, Sitharaman also announced a cut in the corporate tax rate for foreign companies, from 40 percent to 35 percent.

“We are trying to bring in ease of doing business in India,” she said. 

There has been a consistent and continuing effort to relax the government’s policies to attract FDI, she said. 

“In that process, we are willing to do further simplification,” Sitharaman said.

Sitharaman said India’s federal states will be incentivised to implement their own business reforms and action plans to make federal investments more attractive.

Capital gains tax and real estate adjustments

The budget proposed increases in capital gains taxes, with the tax on long-term gains increasing from 10 percent to 12.5 percent and the levy on stocks held for less than 12 months rising from 15 percent to 20 percent. 

Rupen Rajguru, head of equities at Julius Baer India, says the new budget is “a bit disappointing” for capital markets.

Century’s Valecha suggests that the long-term effect of the government’s efforts to boost employment opportunities could result in increased disposable income, leading to increased consumption and shareholder value.

Benefits could be seen for the construction, steel, and engineering industries, making some thematic mutual funds a lucrative investment choice, he says.

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In the real estate sector, the budget’s removal of the indexation benefit, which took inflation into account, may prompt NRIs to reconsider their long-term strategies. 

Fernandes says: “With rental yields well below par, especially on residential assets in India, investors will now look at a shorter term to turn around their investments, as it does not benefit them to retain these assets for a longer period any more.”

Around 15 percent of real estate investments in India last year were made by NRIs.

Good for gold and currency

The budget’s reduction in gold and silver import duties from 15 percent to 6 percent is expected to benefit UAE retailers.

Valecha says: “Gold prices in Dubai are generally 12 to 15 percent lower than in India, so retailers who purchase gold in the UAE and export it to India are bound to benefit."

The government also plans to promote the use of the Indian rupee as a currency for overseas investments. Last year, India and the UAE established a framework called the Local Currency Settlement System, enabling transactions between the two nations using their local currencies.