As the Union Budget approaches, startups and investors are intensifying calls for targeted incentives to support large language models (LLMs) and deeptech, alongside long-pending demands for tax clarity and easier access to capital.
Founders maintain that without sustained policy backing for indigenous AI and long-cycle research, the country risks falling behind in the development of globally competitive technology platforms.
According to them, policy support for indigenous AI and sustained research funding will be critical if the country is to build globally competitive technology platforms rather than remain a downstream adopter.
Startups working on artificial intelligence are seeking explicit incentives for building India-first LLMs, agentic AI platforms and sovereign AI stacks tailored to local languages and domestic use cases.
Ankush Sabharwal, founder and chief executive of CoRover, said that expectations include larger allocations for GPU infrastructure, regulatory sandboxes and outcome-linked incentives for deploying AI in public services, MSMEs and Bharat-focused applications.
According to founders, such measures could lower entry barriers in capital-intensive AI development and accelerate adoption at scale.
Deeptech and R&D Funding
Beyond AI, deeptech entrepreneurs are pressing for sustained R&D funding and manufacturing support. The government announced a Rs 10,000 crore Fund of Funds for deeptech startups in the previous Budget, but founders say longer-term backing is needed given extended development cycles and high upfront costs.
Naman Pushp, founder and chief executive of drone-delivery startup Airbound, said limited access to patient capital often forces Indian companies to replicate foreign designs or outsource core innovation.
He added that capex support for advanced manufacturing, including machinery, skilling and facility build-outs, along with specialised industrial zones beyond existing SEZs, would help sectors such as drones move faster from prototypes to scale.
Alongside these forward-looking demands, long-standing tax issues continue to dominate startup feedback. A key concern remains the dual taxation of employee stock ownership plans, which are taxed at the time of exercise and again at sale.
Founders say this creates a liquidity crunch for employees of unlisted startups, where shares cannot be sold immediately. “ESOPs should only be taxed at the time of sale, when employees can actually realise the value. This would align tax liability with cash inflows, making ESOPs more attractive,” Archit Gupta, founder and chief executive of ClearTax, said.
Startups are also seeking clarity on cross-border ESOP taxation to avoid double taxation when employees relocate in or out of India.
Predictability for Investors
Investors, meanwhile, are focused on predictability in tax treatment and ease of doing business. A Deloitte note on pre-Budget expectations said private equity and venture capital investors are seeking relief from anti-abuse provisions that unintentionally penalise genuine off-market share transactions in listed companies when market prices move between signing and closing.
The lack of clarity on taxation of carried interest continues to be a major overhang. Carried interest, the share of profits earned by fund managers above a threshold, is yet to be explicitly classified for tax purposes. Investors want it recognised as capital gains income and exempted from GST.
“This lack of clarity often creates uncertainty for fund managers, as carried interest may be subject to tax as business income at the applicable tax rate,” Nandita Tripathi, partner at Deloitte, said.
Industry bodies are also pushing for measures to deepen domestic capital pools. The Indian Venture and Alternate Capital Association has sought tax incentives to channel private credit into MSMEs, startups and infrastructure, while calling for clearer tax treatment for Category III alternative investment funds to reduce disputes and double taxation.
“Given the higher tax incidence faced by domestic investors, a more balanced tax treatment for taxation of interest income would enable long-term domestic capital to participate more effectively in financing these priority sectors,” said Srini Srinivasan, managing director at Kotak Alternate Asset Managers and vice-chairperson of IVCA.