Budget 2026 has shifted share buyback taxation from "deemed dividend" treatment (introduced in 2024) back to capital gains for all shareholders, taxing only the actual profit (buyback price minus cost) while promoters face an additional tax to curb arbitrage.

How buybacks were taxed before Budget 2026

• From October 2024, companies stopped paying buyback tax; instead, shareholders treated the entire buyback proceeds as dividend income taxed at slab rates (up to 30%+), even though it included return of original capital.

• The cost of tendered shares became a capital loss (short-term or long-term), set-off against other gains or carried forward for 8 years, creating complexity and unfairness for small shareholders.
• This led to fewer buybacks (only 14 in 2025 vs. 48 in 2023–24) as promoters avoided high effective taxes on full proceeds.

New capital gains tax on buybacks (Budget 2026)

• Buyback proceeds are now capital gains for everyone: LTCG at 12.5% (holding >1 year for listed equity) or STCG at slab rates (<1 year), only on (buyback price – cost of acquisition).

• Promoters pay extra: Corporate promoters face 22% effective rate; non-corporate promoters 30%, preventing tax arbitrage vs. dividends.
• Example: Buy 100 shares at ₹40 (total cost ₹4,000); 20 tendered at ₹60 (proceeds ₹1,200):
  • Gain = (₹60 – ₹40) × 20 = ₹400 LTCG taxed at 12.5% = ₹50 tax (vs. ₹360 on full ₹1,200 as dividend at 30%).
• Applies to equity shareholders up to 10% holding; cost remains deductible as capital loss for set-off.

Advantages of New Buyback Tax Regime

• Fairer for retail/minority shareholders: Tax only on actual gains at 12.5% LTCG, not full proceeds at slab rates up to 35%+.

• Revives buybacks: Fixes 2024 flaw that killed activity (14 issues in 2025); companies can return capital efficiently alongside dividends.
• Closes promoter arbitrage: Extra 22–30% tax ensures promoters don't favour buybacks over dividends for tax savings.
• Simpler compliance: Capital gains treatment aligns with normal share sales; easier ITR reporting and loss set-off. ​

Risks of New Buyback Tax Rules

• Litigation risk on capital loss set-off against buyback gains, especially with other capital income in same year. ​

• Promoters still deterred: 22–30% effective rates may limit buyback use vs. dividends for large stakeholders.
• Short-term holders hit: STCG at slab rates could exceed LTCG benefits if holding <1 year.
• Complexity for funds: ESOPs, foreign investors may face transitional issues on cost basis and treaty benefits.

Buyback capital gains tax – FAQs

1. Are buybacks now taxed as capital gains or dividends?
All buyback proceeds are capital gains on (buyback price – cost), not full amount as dividend; LTCG 12.5% (>1yr), STCG at slabs.

2. Do promoters pay the same tax?
No – corporate promoters: 22% effective; non-corporate: 30% via additional buyback tax to prevent arbitrage.

3. What about my original share cost?
Tendered shares' cost is capital loss (STT/LTT), set-off against other gains or carried forward 8 years.

4. Example of tax savings?
₹1,200 proceeds (cost ₹800, gain ₹400): Old = ₹360 tax (30% dividend); New = ₹50 tax (12.5% LTCG).

5. When does this apply?
Budget 2026 proposals effective for buybacks post-enactment; replaces Oct 2024 dividend regime.