Currently, since buybacks are treated as dividends, the applicable tax slab will decide the rate of tax | Photo Credit: Tax rise to pay for Coronavirus COVID-19 crisis

Budget 2026 has proposed a key change to how buybacks will be taxed on listed shares from FY27.

Currently, the consideration received on buyback of shares is treated as dividend — taxable as per a person’s applicable tax slab. While the consideration was thus taxed, the cost of acquisition of shares so bought back was allowed to be claimed as a capital loss, which could be used to set off against any other capital gain.

If the proposal in the Finance Bill, 2026 were to come into effect, buybacks will be taxed as capital gains itself — the difference between the consideration received and cost of acquisition (inflated by directly attributable costs such as brokerage) of the shares bought back, serving as the amount of capital gain. In case of long-term capital gains, the applicable tax rate is 12.5 per cent and it is 20 per cent for short-term gains. The holding period required to qualify as a long-term capital asset remains unchanged at more than 12 months.

However, the above tax rates are applicable only for public shareholders. For promoters though, the tax rate is higher, although buybacks will be treated as capital gains.

First is the case of corporate promoters incorporated in India. Here, the tax rate is 22 per cent for both long-term and short-term gains. In case of any other kind of promoter (individual, foreign corporate among others), the tax rate is 30 per cent for both long-term and short-term gains.

If you are a public shareholder, how does your tax liability change? Here is an analysis.

Currently, since buybacks are treated as dividends, the applicable tax slab will decide the rate of tax. In this example the taxpayer is assumed to have opted for the more beneficial new regime, where income up to ₹12 lakh carries no tax liability. If her total income including buyback falls within ₹12 lakh (₹12.75 lakh for salaried taxpayers), she could get away without paying any tax.

However, if the proposed taxation comes into effect, long-term capital gain rate of 12.5 per cent or a short-term capital gain rate of 20 per cent will apply. Only if her total income including the capital gain on buyback does not exceed ₹4 lakh, she could get away with paying no tax. This is because, the maximum income not chargeable to tax is still ₹4 lakh and it is only due to the existence of a rebate (up to ₹60,000) that a taxpayer’s liability is made zero, even when total income reaches up to ₹12 lakh or ₹12.75 lakh, as the case may be. However, the rebate does not apply for long-term and short-term capital gains tax on listed shares. Thus, if a taxpayer’s total income (including the buyback capital gain) exceeds ₹4 lakh, the tax liability will work out to a sum of (a) and (b). (a) being the capital gains tax on buyback and (b) being the tax on income other than the buyback, calculated as per the applicable tax slabs.

The illustration explains how taxation under new proposal will play out under different scenarios.

Overall this is a welcome move. Prior to the change in buyback tax rules to the current rule in the 2024 Budget, there was tax arbitrage advantage in choosing buyback as the way to return capital instead of dividends. While this was viewed as good for investors, it was not entirely so. Both buyback and dividends are return of investors’ money to them. When money was returned via buybacks, there was logic for some investors to consider it as a signal from management/board that they were positive on the long prospects of the company and viewed the shares as undervalued. Thus the tax arbitrage advantage of buybacks was creating distortions in signalling.

The 2024 budget fixed this, but more than just fixing the tax arbitrage, it took it to an other extreme by making the buyback taxation a bit more punitive. The proposal in 2026 Budget proposal now balances the two. With higher taxation for promoters, it is not in the interest of management and boards to choose buybacks as the medium to return capital unless they want to send a signal to the markets.

Published on February 1, 2026