Is India's IPO boom a tax-play in disguise? Nithin Kamath thinks so

Zerodha co-founder breaks down how tax math shapes India's IPO frenzy

India’s stock markets may be buzzing with new-age IPOs, but Zerodha co-founder Nithin Kamath believes the frenzy isn’t just about ambition or growth stories, it may have a lot to do with how India taxes profits and investments.

 

In a detailed post on X, Kamath argued that the country’s tax design could be nudging startups and venture capitalists (VCs) to chase sky-high valuations instead of profits. By exploiting a gap between how dividends and capital gains are taxed, he said, investors may be building growth narratives that fuel India’s IPO pipeline.

The tax gap that drives incentives

Kamath explained that if an investor withdraws money from a business as dividends, the effective tax rate can go up to 52 per cent - 25 per cent corporate tax plus 35.5 per cent on personal income. However, capital gains on share sales attract just 14.95 per cent, including cess. “If you're an investor, especially a VC, the math is simple- reduce corporate tax by showing minimal profits or losses. Spend on acquiring users, build a growth narrative, and then sell shares at a higher valuation while paying much lower tax,” Kamath wrote.

 

 

This tax differential, he noted, pushes venture-backed startups to spend aggressively and delay profitability, creating a cycle where fast growth is rewarded more than financial discipline.

A system that rewards unprofitable growth

Kamath called this behaviour a “tax arbitrage game” that has shaped India’s startup ecosystem. Most VC-backed companies listed in recent years, he said, show little or no profit for this very reason.

 

“Unprofitable growth gets valued at much higher multiples than steady profits,” he noted. “A company doing Rs 100 crore revenue with 100 per cent growth might get valued at 10–15x, while a profitable one with 20 per cent growth gets 3–5x. So VCs aren't just saving on tax, they're creating a 3x higher exit valuation.”

IPOs as the only exit route

With limited merger and acquisition opportunities in India, Kamath said IPOs have become the default escape hatch for investors seeking returns after years of funding startups. “Every startup faces constant pressure from VCs for an exit. With almost no M&A opportunities in India, IPO is often the only way out,” he said.

The unintended consequence

Kamath acknowledged that the government may have structured taxes to encourage reinvestment, not hoarding. But he warned that the policy might be creating fragile, cash-hungry businesses. “It’s creating companies that aren’t very resilient. One prolonged market downturn, and many of these unprofitable companies would struggle to survive,” he cautioned.

 

His analysis offers a rare insider’s view of how tax incentives, investor behaviour, and market valuation together may be fuelling India’s ongoing IPO boom.