The Finance Bill 2026 has proposed to move taxation on buyback of shares from dividend to capital gains for small shareholders. The tax on long term capital gains is 12.5% with an additional surcharge.
The proposal will help listed companies to promote buyback of shares. The promoters will continue to get taxed as dividend at normal rate i.e. 22% or 30% for promoters other than domestic companies (plus surcharge). The promoter is defined as one which owning more than 10% of equity capital of a company. Thus preferential rate of capital gains tax (12.5%) will be available to those shareholders who own 10% or less in the company.
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.
"Amendment in buyback taxation to treat it as capital gains as earlier is positive for retail and non-promoter shareholders," said Vaibhav Gupta, partner at Dhruva Advisors. He added that a potential area of dispute that may rise to litigation in the future relates to the set‑off of capital losses against buyback proceeds, particularly in situations where the shareholder has other capital gains income in the same financial year. The tax officer is likely to disallow the loss offset against buyback income as it would reduce the additional income tax payable by promoters.
In the past, earlier changes to these rules had resulted in a noticeable drop in the number of share buyback announcements made by companies. New buyback rules were announced in Budget 2024, effective from October, 2024, which had shifted the income tax liability from the corporates to the shareholders.
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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