Budget 2026: Buy back proceeds will be taxed as capital gains for shareholders, but promoters pay an extra price
Feb 2, 2026
The budget has announced a major overhaul in the taxation of share buybacks, shifting them from dividend taxation to the capital gains framework, while imposing a higher effective tax on promoters to curb misuse of the route. Once legislated, it will apply to buy backs after April 1.
The silver linings: Many shareholders could end up with a lower tax burden or even a nil tax burden. To illustrate: the long term capital gains tax arising on sale of listed shares (held for more than 12 months) is 12.5% without indexation (Further long term capital gains of up to Rs. 1.25 lakh arising against listed shares/equity MFs are exempt from tax). For shares held for less than 12 months, the tax on short term capital gains is 20%. On the other hand, under the existing regime, a shareholder who fell in the top slab ended up paying 30% tax on the ‘deemed dividend’ component arising on a buy-back, plus surcharge and cess – which translated into an effective tax rate of 35.88%.
Under the budget proposal, consideration received by shareholders on buyback of shares will no longer be treated as dividend income. Instead, it will be taxed as capital gains, aligning buybacks with the treatment of share sales in the market.
“In the interest of minority shareholders, I propose to tax buyback for all types of shareholders as capital gains. However, to disincentivise misuse of tax arbitrage, promoters will pay an additional buyback tax,” the FM mentioned in her speech.
Currently, as per an amendment made in 2024 there is a two-part mechanism for taxing shareholders in a buy back transaction: First, the entire buyback consideration is taxed as “deemed dividend” under section 2(22)(f). Second, the original cost of the shares becomes a capital loss under section 46A. It is to be adjusted against other capital gains either in the same financial year or as set-off over the subsequent eight years,
This means taxpayers pay high tax today and receive relief only later—and only if they have gains to offset.
“In case of buyback of shares, both listed as well as unlisted, the shareholder was subjected to tax on the entire buyback proceeds as dividends, with cost of the shares being allowed as a capital loss. This was unfair to shareholders other than promoters, particularly domestic retail shareholders of listed companies, where often it was more beneficial to sell the shares on the market at a lower price and pay capital gains tax, rather than paying the higher dividend tax. Now, the law is being rationalised for buybacks completed on or after April 1, 2026,” states Gautam Nayak, tax partner at CNK& Associates.
The FM has sought to remedy this, even as there is a slight sting for the promoter group. The explanatory memorandum states that owing to the distinct position and influence of promoters in corporate decision-making, particularly in relation to buy-back transactions, for promoters the effective tax liability on gains arising from buy-back shall be thirty per cent, comprising tax payable at the applicable rates together with an additional tax. In case of promoter companies, the effective tax liability will be 22%.
Prior to the 2024 amendment, which had introduced a two-part mechanism for taxing shareholders in a buy-back transaction, the proceeds under buyback were exempt in hands of shareholders. However, the company which undertook the buy-back paid a tax. Under section 115QA it was 20% (plus surcharge and cess) on the difference between the buyback price and the issue price of the shares. The objective was to curb misuse of buy-backs. In a similar vein, the promoter company or promoter individual now have to pay a higher tax.
Nayak points out that, “Besides persons classified as a promoter under SEBI Guidelines or under the Companies Act, even a shareholder holding more than 10% shareholding (directly or indirectly) in a company would be classified as a promoter and would bear this relatively higher tax burden under the budget proposal.”
Tax implications in the hands of a shareholder:
| Particulars | Computation / Details | Amount (Rs.) |
| Shares purchased (2020) | 100 shares @ Rs. 40 per share | — |
| Cost of acquisition | 100 × 40 | 4,000 |
| Shares bought back (2024) | 20 shares @ Rs. 60 per share | — |
| Income taxable as deemed dividend | 20 × 60 | 1,200 |
| Tax on deemed dividend @30% | 30% of 1,200 | 360 |
| Capital loss on buy-back | Cost of 20 shares (20 × 40) | 800 |
Note: The capital loss of Rs. 800 can be set off only against capital gains in the same year or carried forward for up to eight assessment years, subject to availability of capital gains income.
Proposed
| Particulars | Computation / Details | Amount (Rs.) |
| Shares purchased (2020) | 100 shares @ Rs. 40 per share | — |
| Total cost of acquisition | 100 × 40 | 4,000 |
| Shares bought back (2027) | 20 shares @ Rs. 60 per share | — |
| Long-term capital gains (LTCG) | (60 − 40) × 20 | 400 |
| Tax on LTCG @12.5% | 12.5% of 400 | 50 |
| Tax payable | Exempt (within threshold) | Nil |
Note:
Long-term capital gains on listed equity shares are exempt up to Rs. 1.25 lakh. Since the LTCG in this case is only Rs. 400, no tax is payable, which means many small shareholders may not incur any tax liability on such buy-backs under the proposed regime.
[The Times of India]
