Finance Minister Nirmala Sitharaman has proposed that buyback proceeds for all categories of shareholders will now be taxed as capital gains, moving away from earlier mechanisms that treated different shareholders differently.
Announcing a major change in the taxation of share buybacks in her Budget speech, she explained that under the new structure, corporate promoters will face an effective tax rate of 22%, while non‑corporate promoters will be taxed at 30% on buyback transactions.
The move aims to streamline taxation, reduce arbitrage between shareholder classes, and ensure a more uniform and transparent tax treatment of buyback‑related income.
The updated regulations—framed under the new Income Tax Act, 2025—are scheduled to come into force on April 1, 2026.
In the past, earlier changes to these rules had resulted in a noticeable drop in the number of share buyback announcements made by companies.
A key feature retained in the new framework is the way the acquisition cost of shares is treated during a buyback. The amount paid for shares that investors tender will still be recognised as a capital loss—classified as short‑term or long‑term depending on how long the shares were held. These losses may continue to be offset against other capital gains, or carried forward for up to eight years, offering investors a degree of flexibility and relief under the revised regime.
According to the Finance Minister, the revamped structure is designed to eliminate tax distortions that previously made buybacks more attractive than dividends for listed companies. For retail shareholders, shifting the tax treatment to the capital‑gains framework is expected to provide greater clarity and reduce disputes around how such income should be categorised. For promoters, the introduction of an additional levy is intended to correct what the government considers an imbalance created by the earlier rules, which had inadvertently given them a tax edge.
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