How buyback taxation has changed post-Budget 2026. Can it lead to paying more taxes?

How buyback taxation has changed post-Budget 2026

• Budget 2026 treats buyback proceeds as capital gains, not dividend income
• Retail investors benefit with lower tax on buybacks, taxed at 12.5% or 20% rates
• Promoters face higher buyback tax: 22% domestic, 30% foreign

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Finance Minister Nirmala Sitharaman on February 1 presented Union Budget 2026. During her Budget speech she announced that buyback proceeds for all shareholders will be treated as capital gains. What does it mean for you and how it changes taxation for you?

Historically, buybacks were taxed at the company level. The company paid a buyback tax around 20 percent, and the buyback proceeds were tax-free in the hands of the shareholder. That made tendering shares in a buyback often more attractive than selling them on the open market where capital gains tax would apply.

However, this changed with the Finance Act (No. 2), 2024, effective October 1, 2024. Under the amended provisions, buyback proceeds were shifted to the hands of the shareholder and treated as dividend income for tax purposes with no deduction for cost of acquisition. The cost of the shares bought back by the company is treated as a capital loss- short-term or long-term depending on the holding period. This loss can be set off against taxable capital gains as per the provisions for set-off and carry-forward of losses under income tax laws.

That was a double whammy for many: they lost the tax-free status and often paid more tax than they would have on capital gains.

Budget 2026 now restores the capital gains treatment, but with key differences that matter for investors. Under the new framework proposed by Finance Minister Nirmala Sitharaman, all buyback proceeds will be taxed as capital gains for shareholders rather than dividend income aligning buybacks with how gains on regular share sales are taxed. This removes the anomaly where buybacks could attract slab rates without allowing for the cost of acquisition to be deducted.

“It is proposed to provide that consideration received by a shareholder on buy-back shall be chargeable to tax under the head “Capital Gains” instead of being treated as dividend income," FM said in the Budget speech.

"The proposed change will result in lower tax liability in the hands of retail investor specially those who were under 30 percent tax bracket," Gopal Bohra, Partner -Tax, N.A.Shah Associates.

For example, a shareholder acquired 100 shares at Rs 10 per share and tendered them under a buy-back at Rs 15 per share. Under existing law shareholder is required to pay dividend tax on Rs 1500 at the applicable tax rate and will be entitled to a capital loss of Rs 500, which can be set off against another capital gain. As against the proposed amendment, shareholders will pay only capital gain tax on Rs 500 at 12.5 percent in case of LTCG or 20 percent in case of STCG from listed securities added Bohra.

Who gains and who loses?

The biggest beneficiaries are small shareholders. Earlier, many retail investors could not fully utilise the capital loss created on buybacks because they did not have sufficient capital gains to offset it. The new system ensures that only actual gains are taxed, making the process simpler and fairer.

Tax efficiency however, reduces under the new regime. "This amendment has been restored to attract capital gain tax which does not attract 87A rebate. So, more tax to be paid now as compared to previously," said Himank Singla, founding partner, SBHS & Associates.

Section 87A provides a rebate of up to Rs 75,000 for resident individuals with total income up to Rs 12 lakh under the new tax regime. It does not include income taxable at special rate including capital gains.

For retail and non-promoter investors, this is largely beneficial. Gains are treated as capital gains, meaning long-term gains are taxed at 12.5 percent and short-term gains at 20 percent (plus surcharge and cess), which is typically lower than the slab rates under “income from other sources.” This should reduce tax outgo on buyback proceeds compared to the post-2024 regime where the entire receipt was taxed at slab rates.

But not all shareholders benefit equally. Budget 2026 introduces a differentiated levy for promoters to curb potential misuse of buybacks as a tax arbitrage tool.  It is also proposed to provide for a differential rate for promoters wherein the effective rate on gains in buyback will be 22 percent for promoters which are domestic companies and 30 percent for promoters other than domestic companies.

So, does this mean retail investors will pay more tax? It depends on your tax bracket and your role as a shareholder. Under the 2024 amendment, some high-income investors effectively paid more by having the entire buyback proceeds taxed at slab rates. Moving back to capital gains basis now generally lowers the tax bite on buybacks for ordinary investors, especially if you qualify for long-term capital gains rates.