Grant vs Equity vs Debt: How Indian Startups Can Fund Themselves

A government grant gives you money that you don't repay and that doesn't cost you shares, but it's small, tied to milestones and competitive. Equity brings in larger amounts with no repayment, but you give up part of your company. Debt lets you keep full ownership, but you repay it with interest whether or not the business works out. Most Indian startups use more than one, in a sequence that matches their stage.

This comparison is based on official guidelines as of October 2026; always check the official portals for the latest rules.

Grant vs equity vs debt at a glance

The limits above come from the official sources quoted in each section below.

Government grants

A grant is support you don't repay and that doesn't dilute you. The trade-off is that it's usually small, paid in milestone-based instalments, restricted to specific uses, and decided by a selection committee.

Startup India Seed Fund Scheme (SISFS). The DPIIT guidelines allow up to Rs 20 lakh as a grant to validate a proof of concept, develop a prototype or run product trials. The money is released in milestone-based instalments through a selected incubator. Your startup must be DPIIT-recognised and incorporated no more than 2 years before you apply. It also shouldn't have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme. The seed fund can't be used to create facilities.

The Seed Fund portal shows a final notice: the last date for startups to apply was 31 May 2026, and incubators had until 30 June 2026 to complete selection. Watch the portal for any new call. Our SISFS guide explains how the application works.

BIRAC Biotechnology Ignition Grant (BIG). According to BIRAC's BIG page, biotech startups can get up to INR 50 lakh of grant-in-aid for up to 18 months to turn an idea into proof of concept. Calls are announced twice a year, on 1 January and 1 July.

These are only two examples. Browse schemes and subsidies for others that match your sector and state.

Equity, including government-backed funds

With equity, investors buy shares in your company. There's no interest and no repayment, but you give up ownership and usually some control over decisions, and each later round dilutes you further.

The government's main equity scheme doesn't invest in startups directly. It invests in venture funds that do.

Fund of Funds for Startups (FFS 1.0). According to PIB's release of 14 February 2026, FFS was launched in 2016. Its entire Rs 10,000 crore corpus has been committed to 145 Alternative Investment Funds (AIFs). Those AIFs have invested over Rs 25,500 crore in more than 1,370 startups.

Startup India Fund of Funds 2.0. PIB's release of 13 April 2026 says the government has notified a new fund of funds with a corpus of Rs 10,000 crore. It will contribute to SEBI-registered AIFs that invest in recognised startups. Its priority segments are deep tech, early-growth startups backed by smaller AIFs, technology-driven and innovative manufacturing, and sector- or stage-agnostic startups. SIDBI is the implementing agency, and a second domestic agency is to be selected.

In practice, you don't apply to SIDBI for equity. You pitch the AIFs that the fund of funds has backed, and they make their own investment decisions. To find investors, see our investor directory.

The angel-tax point. Section 56(2)(viib) of the Income-tax Act, 1961 taxed a company in which the public aren't substantially interested on share money received above the shares' fair market value. The Finance (No. 2) Act, 2024 (16 August 2024) added a proviso saying the clause "shall not apply on or after the 1st day of April, 2025". The Memorandum to the Finance Bill explains that this sunsets the provision from assessment year 2025-26. For earlier years, the old rules and any past assessments still matter, so speak to your CA.

Debt, including government-backed loans

Debt keeps your ownership intact. You repay principal and interest on schedule, so it suits businesses with cash flow or a clear route to it. Government schemes make debt easier to get by guaranteeing it or setting its terms, but the lender still decides.

Pradhan Mantri MUDRA Yojana (PMMY). According to MUDRA, PMMY loans go to non-corporate, non-farm small and micro enterprises through banks, RRBs, small finance banks, MFIs and NBFCs. The Offerings page gives four categories:

• Shishu: up to Rs 50,000
• Kishor: above Rs 50,000 and up to Rs 5 lakh
• Tarun: above Rs 5 lakh and up to Rs 10 lakh
• Tarun Plus: above Rs 10 lakh and up to Rs 20 lakh, only for borrowers who took and repaid a Tarun loan (MUDRA home page)

The MUDRA FAQ says banks are mandated not to insist on collateral for micro and small enterprise loans up to Rs 20 lakh, that there is no subsidy and that interest rates are deregulated. MUDRA describes PMMY as a scheme for non-corporate businesses, though the same FAQ lists private limited companies among eligible applicants, so ask your lender whether it will lend to your company or LLP under PMMY. See our MUDRA guide and MUDRA listing.

CGSS-backed loans. The Credit Guarantee Scheme for Startups lets scheduled commercial banks, financial institutions, eligible NBFCs and SEBI-registered AIFs lend to DPIIT-recognised startups with a government guarantee through NCGTC. The CGSS Gazette notification of 8 May 2025 sets cover at 85% of the amount in default for loans up to Rs 10 crore and 75% above that, with a cap of Rs 20 crore per borrower. The NCGTC FAQ says there's no interest-rate cap, and tenor is set by each lender's internal guidelines.

JanSamarth's Loan for Startups page gives the terms on its product:

• No collateral on accounts covered by CGSS
• Margin generally at least 25%
• Term loans generally repaid over 3 to 7 years
• No prepayment penalty
• You're expected to be earning revenue and have customers, or meet the bank's own policy

See our CGSS guide and CGSS listing. If you're a micro or small enterprise, also look at CGTMSE.

SISFS debt tranche. Besides the grant, the SISFS guidelines allow up to Rs 50 lakh for market entry, commercialisation or scaling up. This comes as convertible debentures, debt or debt-linked instruments. The guidelines set these terms:

• Interest of no more than the prevailing repo rate
• Tenure of no more than 60 months
• A moratorium of up to 12 months
• Unsecured, with no promoter or third-party guarantee required

Convertible debentures can turn into equity later, so read the conversion terms in your agreement with the incubator.

How founders combine them

These options aren't mutually exclusive. A common pattern is to match each one to a stage:

1. Prove the idea with grants. Grants fit work that investors and banks won't fund yet, such as a prototype or proof of concept. Check each scheme's limits on other government support. For example, SISFS excludes startups that already received more than Rs 10 lakh under another government scheme.
2. Raise equity for growth you can't fund from revenue. A grant-funded prototype or early traction gives investors something concrete to assess.
3. Add debt once you have cash flow. Working capital and term loans fund inventory, equipment or receivables without further dilution. Guarantee schemes like CGSS and CGTMSE can reduce the collateral a lender asks for.

Rules to keep in mind when you mix them:

• Grant conditions. Grants come with conditions on how you use the money. Equity or debt raised later doesn't remove them.
• One guarantee per loan. Under the CGSS Gazette notification, a facility covered under CGSS shouldn't be covered under any other guarantee scheme. The NCGTC FAQ also says an existing ECLGS loan has to be closed before you take CGSS.
• Lenders look at your equity. JanSamarth's documents checklist for startup loans asks for PE/VC investment details in the project report.

Which mix suits you depends on your stage, sector, cash flow and appetite for dilution. This guide isn't financial advice. Talk to a CA or adviser about your own situation, or see our services for help with applications.

FAQ

Is a government grant better than equity?

Neither is better in general. A grant doesn't dilute you, but it's usually small, tied to milestones and limited to certain uses. Equity can fund much larger growth but costs ownership. A common sequence is a grant for proof of concept, then equity for growth.

Does the government invest equity directly in startups?

Under the Fund of Funds, no. The government contributes to SEBI-registered AIFs, and those funds decide which startups to back. You pitch the AIF, not SIDBI.

Is angel tax still applicable?

Under the Finance (No. 2) Act, 2024, Section 56(2)(viib) of the Income-tax Act, 1961 doesn't apply on or after 1 April 2025, which the Finance Bill memorandum explains as from assessment year 2025-26. Earlier years follow the old rules, so check with your CA.

Can I get a startup loan without collateral?

Possibly. Banks are mandated not to insist on collateral for micro and small enterprise loans up to Rs 20 lakh, which covers MUDRA loans from banks (MUDRA FAQ). Under CGSS, no collateral is required on the covered part of the loan. The lender still decides whether to lend.

Is the SISFS money a grant or a loan?

Both, in separate tranches. Up to Rs 20 lakh can be a grant for proof of concept or prototype work. Up to Rs 50 lakh can come as convertible debentures, debt or debt-linked instruments for market entry or scaling, at no more than the repo rate.

Which should I try first?

It depends on your stage. Pre-revenue startups building a prototype tend to look at grants first. Startups with revenue and repayment capacity tend to look at debt to avoid dilution. Startups chasing fast growth tend to raise equity. Compare business loans, schemes and investors side by side.

Sources

• DPIIT: Guidelines for Startup India Seed Fund Scheme (PDF)
• Startup India Seed Fund Scheme portal
• BIRAC: Biotechnology Ignition Grant scheme
• PIB: Cabinet approves Startup India Fund of Funds 2.0 (14 February 2026)
• PIB: Government notifies Startup India Fund of Funds 2.0 (13 April 2026)
• Gazette of India: The Finance (No. 2) Act, 2024 (16 August 2024)
• India Budget: Memorandum explaining the provisions in the Finance (No. 2) Bill, 2024
• MUDRA: home page
• MUDRA: Offerings
• MUDRA: FAQ
• Gazette notification on CGSS, 8 May 2025 (via NCGTC)
• NCGTC: CGSS FAQ, amended as on 8 May 2025
• JanSamarth: Loan for Startups

Cover photo: Gilbert Pagunaling on Unsplash