Budget 2026 Proposes Major Tax Shift for Share Buybacks
In her Budget speech on Sunday, Union Finance Minister Nirmala Sitharaman unveiled a significant proposal to tax the proceeds of share buybacks as capital gains rather than dividend income. This move targets a complex and widely criticized tax rule that has previously resulted in punitive outcomes for promoters and shareholders across India's financial landscape.
Addressing Tax Arbitrage and Promoting Fairness
The Budget also introduced a special capital-gains tax rate of 30% for non-corporate promoters to prevent them from utilizing buybacks as the primary method for extracting profits. In contrast, corporate promoters will be subject to a 22% effective tax rate. This differentiation aims to balance the tax burden while discouraging misuse of buyback mechanisms.
Ankit Agarwal, Managing Director of Alankit Limited, commented on the development, stating, "The move to tax buybacks as capital gains across all shareholder categories is a clear attempt to curb tax arbitrage and bring greater fairness to the system. It supports more transparent and disciplined capital allocation, which is crucial for India's growing economy."
What Has Changed in the Tax Framework?
Under the previous rule, which took effect on 1 October 2024, the entire proceeds from a company's share buyback were treated as dividend income and taxed at the investor's slab rate. This applied irrespective of whether the investor realized a profit, meaning the full amount received—including the original investment or cost of acquisition—was taxed as dividend income.
Since the cost of acquisition was not allowed as a deduction, it was classified as a capital loss that could be set off against capital gains or carried forward. However, this system created uneven outcomes, as dividends were taxed at the taxpayer's slab rate—up to 30% for high-income individuals—while the tax saved by offsetting it against other capital gains was only 12.5%.
This mismatch led to a scenario where investors effectively paid tax on their own capital, diminishing the appeal of buybacks as a method to reward shareholders and distribute corporate profits.
Budget 2026's Solution: Aligning with Capital-Gains Rules
Budget 2026 addresses these issues by reclassifying the consideration received on buybacks as capital gains rather than dividends. This shift is expected to simplify the tax framework and reduce inconsistencies in the system.
Rajarshi Dasgupta, Executive Director of Tax at AQUILAW, emphasized, "Classifying share buyback proceeds as capital gains for all shareholders is a welcome step toward simplifying the tax framework. By aligning buyback taxation with capital-gains rules, the move reduces inconsistencies, brings more transparency, and provides companies and investors with greater clarity when planning buybacks."
The proposed changes are poised to enhance the attractiveness of buybacks as a corporate strategy while ensuring a more equitable tax treatment for all stakeholders involved.
