In a decisive shake-up of corporate tax policy announced in the Union Budget 2026–27, the Government of India has reconfigured the tax treatment of share buybacks, moving away from the dividend-based regime introduced in Budget 2024 to a capital gains framework that benefits ordinary shareholders but imposes higher levies on promoters. The proposal, effective for buybacks conducted on or after April 1, 2026, is poised to influence corporate payout strategies and investor returns.

Under the new regime, consideration received by a shareholder on the buyback of shares will no longer be treated as “deemed dividend”—which was previously taxed at regular slab rates—but instead will be taxed as capital gains, akin to the sale of shares on the market. This aligns the tax treatment of buyback proceeds with the economic reality that only the profit component should attract tax.

Before this amendment, proceeds from buybacks were taxed as dividend income under Section 2(40)(f) of the Income-tax Act, 2025, leading to shareholder tax liabilities as high as 30 % plus surcharge and cess, irrespective of whether the shareholder realised any actual gain. The cost of the shares was treated separately as a capital loss under Section 69, often creating inequities—particularly for minority and retail investors.

“Buyback consideration shall now be taxable only on the net gain, that is, the difference between buyback price and cost of acquisition, aligning the tax with real economic benefit,” stated the Finance Minister during her Budget speech.

This transformation is expected to provide tangible relief to individual investors. For example, if the buyback results in long-term capital gains (held for more than one year), the tax rate is set at 12.5 %, with gains up to ₹1.25 lakh exempt from tax, while short-term capital gains will be taxed at 20 %. Retail shareholders are thus likely to see a lower effective tax burden compared with the former regime.

However, promoters—defined under SEBI Buyback Regulations and the Companies Act as major stakeholders with control rights—will face a significantly different treatment. In a bid to deter tax arbitrage and misuse of buyback routes to reduce tax liabilities, an additional buyback tax is proposed for promoters. Corporate promoters will incur an effective tax rate of 22 %, while non-corporate promoters (including individuals) will be taxed at 30 % on gains arising from buyback.

“To disincentivise promoters from exploiting tax differentials between buybacks and dividends, we are imposing an additional levy on promoter-held buybacks,” the Finance Minister noted in the Lok Sabha.

Tax specialists suggest that by restoring capital gains character to buybacks and introducing differential rates, the Government seeks to strike a balance between protecting minority investors and curbing opportunistic tax planning. While ordinary investors benefit from a fairer regime, promoters may reassess buyback strategies in light of the higher effective tax, potentially leaning towards alternative modes of capital distribution.

The new buyback tax structure also simplifies compliance by aligning buyback taxation broadly with share sale mechanisms, permitting promoters and shareholders to recognise cost basis upfront and reducing the distortions introduced in 2024. The policy change underscores the Budget’s broader intent to rationalise the tax code, enhance investor confidence, and mitigate systemic arbitrage in capital markets.