How & Why Budget 2026 Is The Last Chance To Fix India’s Broken Startup Tax System?

India's startup sector is at a crossroads as the Union Budget 2026 gets closer. The talk has changed from asking for help to making plans and having a vision. More and more, founders and investors are asking a much simpler question: why do well-known problems still exist after years of work and input?

Startups have been a key component of India's economy over the previous ten years. Ministers often go to events about AI, electric automobiles, digital infrastructure, renewable energy, and space technologies. There are a lot of talks regarding rules. There is a lot of information on the inputs. Things are still moving slowly, in fragments, and in small amounts on the ground, though.

The 2026 budget could stop this trend, but only if it fixes the main problems instead of just making small changes.

Capital Gains Tax: Making Startup Equity Less Appealing

The biggest worry for investors is that listed and unlisted shares are still not regarded the same.

There is a distinct tax structure for equities that are listed after a year. These stocks are now viewed as long-term investments. You have to maintain unlisted shares, like startup stock, for two years. If you sell them before that, you'll have to pay taxes at your own rate, which can be as high as 30% to 39%.

This way of thinking makes it more appealing to invest in public markets than in new businesses. It doesn't make sense that an asset type that is riskier, less liquid, and has longer lock-in periods is taxed more.

"If the Indian government wants people to invest a lot of money in new firms, it needs to make it easier for them to pay capital gains tax on equities that aren't listed. Without this, putting money into new enterprises would be a small-scale activity that doesn't assist the ecosystem attain its goals," said Devansh Lakhani, Director & Investment Banker, Lakhani Financial Services.

Taxing ESOPs: A Way to Punish People Who Take Risks

The capital gains tax affects investors, while the ESOP tax directly hurts talent.
People who work for companies that aren't on the stock market have to pay taxes twice: once when they use their options (as salary income, which isn't cash) and again when they sell their options (as capital gains). This means that workers have to pay taxes on their paper earnings long before they really get any money.

Not only is this bad policy, but it also makes ESOPs less helpful for compensating employees. ESOPs are meant to make up for lower pay and the reality that businesses that are particularly dangerous are often not very reliable. Taxing them before they have money goes against their purpose and makes employees less willing to take risks at initially.

"Like capital gains taxes, Budget 2026 has to move fast towards single-point ESOP taxes when it goes on sale. If India doesn't do this, it will be harder for it to find and keep startup talent," commented Devansh Lakhani.

The Startup India Seed Fund: A Plan That Doesn't Work Anymore

As per Devansh Lakhani, another example of a problem that keeps cropping up is the Startup India Seed Fund Scheme: rules that don't fit with how the market genuinely functions.

A gift of Rs 20 lakh in 2016 might have signified something. Not in 2026. Inflation has made it worth a lot less, and the costs of starting a business, especially in tech-heavy locations, have gone up a lot.

"The founders aren't asking for too much; they're just asking for what they need. Seed grants will probably rise to Rs 1 crore, and concessional debt restrictions will probably rise to Rs 5 crore. This is especially true for companies that need a lot of money to get started. If the strategy isn't adjusted, it could be more about the show than the content," added Devansh Lakhani.

Foreign Capital: It Needs to Be More Clear

People from all around the world are still interested in India, but international investors are still apprehensive that the laws aren't clear.

It shouldn't be this complicated to send money to other nations. It's hard to comprehend the laws, it's not clear how taxes will affect you, it's hard to get a licence, and different agencies have different notions about what they mean. This lack of transparency affects both access and exit, which is particularly crucial for foreign capital.

"The budget for 2026 should focus on making the overall investment process smoother, from start to finish. Starting a business shouldn't be hard. It should also be easy to notice when taxes and rules are coming up," stated Devansh Lakhani.

IP and patents: Innovation Can't Wait

As India seeks to thrive by coming up with new ideas, intellectual property is becoming more and more crucial.

It takes a long time for business owners to get patents and trademarks because the Indian Patent Office is quite busy. These kinds of delays are not only inconvenient, but they can also be harmful in fast-paced IT sectors.

"Business owners are more likely to hunt for patents in other countries when it takes a lengthy time to gain approval. To do this, you need to hold IP and be able to gain money from India over time. The 2026 budget should focus on recruiting more workers, turning digital, and speeding up processing to improve the IP infrastructure," Devansh Lakhani commented.

Final Thought

India's startup environment has grown quickly, but the people who are building it have even higher hopes. Investors and founders are no longer asking for more meetings or little changes. They want improvements that are transparent and make it simpler to take risks, such as fair taxation, better financial flows, meaningful support for deep research, and faster protection of intellectual property.

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