Budget & ESOP Clarity, Funding Rundown & More

Wishing you a happy Republic Day from everyone at Inc42!

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Budget 2026: Startup Tax Clarity?

Indian startups are entering the budget season in a tougher new normal. Capital is tighter, scrutiny is higher, and policy frictions are the norm. Amid this, founders want clarity on two major pain points – Angel Tax legacy cases and ESOP taxation. Will Budget 2026 finally clean up this mess?

The Ghost Of Angel Tax: The Centre abolished Angel Tax for startups in July 2024, but many founders say the rollback didn’t resolve past demand notices and penalties. Investors argue that these unresolved liabilities get priced into funding deals or trigger indemnity demands that founders can’t cover. This is especially grim for early stage startups, where one tax shock can consume the entire fund raise.

The ESOP Tax Trap: On the other hand, Indian regulators often tax ESOP gains twice – first at exercise and again at sale. This creates a cash-flow crunch as IPO timelines stretch, making liquidity less predictable. Add the ESOP restriction for the promoters of IPO-bound companies, and you have a cocktail that can distort employee incentives, invite scrutiny, and weaken alignment right before the listing.

What’s The Resolve? Founders and investors want closure on legacy Angel Tax cases and a rational ESOP framework that rewards value creation. They also wish stock option allocation to be governed by shareholder approval rather than automatic performance-based rules. 

Overall, the demand is for measures that provide regulatory certainty and unlock a new phase of growth. Will Budget 2026 finally bring the clarity Indian startups are waiting for? 

From The Editor’s Desk

Weekly Funding Rundown 

• Indian startups cumulatively raised $302.8 Mn across 37 deals last week, up nearly 13% from $286.6 Mn across 28 deals in the preceding week. Emergent and Juspay took home the biggest cheques at $70 Mn and $50 Mn, respectively.
• Fintech topped the sectoral charts at $87.2 Mn across four deals, while AI was close behind at $82.5 Mn across four deals. Ecommerce remained the busiest by deal count as 10 companies raised $56.4 Mn.
• Seed stage funding rose 32% week-on-week to $21.7 Mn across nine deals, while Fireside Ventures and Kae Capital emerged as the most active institutional investors last week.

New-Age Tech Stocks Bleed

• Startup stocks saw a sharp correction last week. Of the 50 new-age tech stocks under Inc42’s coverage, 42 fell in the range of 0.33% to over 20% due to valuation resets and profit-booking.
• The cumulative market cap of these 50 companies tanked $9.5 Bn, settling at $127.05 Bn. The number rose slightly to $127.94 Bn due to the addition of Amagi, which listed last week.
• The sell-off came as broader market indices tanked 2.5% due to global trade tensions, the highest FII outflows since August 2025, a weakening rupee and souring investor sentiment.

India’s AI Incident Database

• The principal scientific advisor (PSA) to the Centre has recommended creating a national database to record, classify and analyse AI-related risks and incidents. As per the top official, the registry should cover AI safety failures, bias, breaches and misuse.
• The recommendations were part of a white paper, which also proposes a ‘techno-legal’ governance approach that blends legal duties with technical controls to reduce harm and keep innovation pathways open.
• The timing is strategic. Later next month, New Delhi will host the India AI Impact Summit 2026, which will see global AI leaders like CEOs of OpenAI, Google and Anthropic in attendance.

Andhra Eyes U-16 Social Media Ban

• The Andhra Pradesh government is exploring a legal framework to restrict access to social media platforms for children under 16. The state is studying Australia’s under-16 model to shape a strong legal enactment.
• The ruling Telugu Desam Party has publicly backed the idea, framing it as a child and women safety measure. The party argues that minors lack the emotional maturity to process harmful content online.
• Social media regulation is primarily a Union subject, so the local government’s plan depends on Centre-State coordination, or on designing state-level measures that can coexist with national rules governing digital intermediaries.

India’s Unicorn Tracker

• India kicked off 2026 with Juspay becoming the first unicorn of the year. This comes even as the homegrown startup ecosystem has moved away from the rapid unicorn-minting cycle seen during the 2021 funding boom.
• Unicorn creation has decelerated over the years. While the ecosystem produced 45 unicorns in 2021, the number dropped to a mere six in 2025. This shows that the post-winter bar for $1 Bn valuations is now much higher.
• Despite the slowdown, India is home to 127 unicorns, which have raised $117 Bn+ to date and command a combined valuation exceeding $390 Bn.

Inc42 Markets

Inc42 Startup Spotlight

Can Smallest.ai Fix Voice AI’s Latency Problem?

Voice AI is becoming a default business interface. However, real-time chatbots still break down under latency, uneven accuracy, and deployment constraints, which erodes trust. Enter Smallest.ai, a startup that aims to make AI voice interactions feel instantaneous and human.

The Founding Thesis: Founded in 2023, Smallest.ai is focussed on small AI models that prioritise responsiveness and conversational flow over brute scale. It offers text-to-speech and speech-to-text models designed for natural dialogue, including emotional context, breathing patterns, and multilingual output across top Indian and major global languages.

Hitting The Market: As part of its go-to-market strategy, Smallest.ai went horizontal, but leaned into BFSI first. It now counts publicly listed banks and fintechs in India and the US as customers. The startup monetises through annual enterprise licensing and SaaS subscriptions with usage-based pricing. 

Backed by Sierra Ventures and 3one4 Capital, the voice automation platform claims to have reported a 300% revenue growth in the US and 150% YoY growth in India, driven by rising demand for scalable solutions. As voice AI emerges as the norm, can Smallest.ai become the default enterprise conversation layer?

Infographic Of The Day

India’s AI moment isn’t about catching up. It’s about building a full-stack, India-first ecosystem — from compute to real-world impact.

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