Starting April 1, 2026, the taxation of share buybacks in India will undergo a significant change, shifting from the dividend taxation framework to capital gains. This amendment, proposed in the Finance Bill 2026, will impact the tax implications for investors participating in share buyback programs.

Understanding the Change

Currently, the entire amount received by shareholders during a buyback is treated as dividend income and taxed according to the shareholder's income tax slab. For high-income individuals, this could mean a tax rate of 30% plus applicable surcharge and cess. The existing rules also allow the cost of acquisition to be considered a capital loss, which can be offset against capital gains or carried forward. However, in practice, these set-off provisions are not always fully accessible to taxpayers.

Under the new regime, the difference between the consideration received from the buyback and the cost of acquisition will be taxed as capital gains. This aligns the taxation of buybacks with the treatment of share sales in the market.

Impact on Investors

The shift to capital gains taxation could have varied impacts on different types of investors:

• General Shareholders: Many shareholders may experience a reduced tax burden or even a nil tax liability under the new capital gains framework. For instance, long-term capital gains tax on listed shares (held for over 12 months) is 12.5% without indexation. Moreover, long-term capital gains up to ₹1.25 lakh from listed shares or equity mutual funds are exempt from tax. For shares held less than 12 months, the short-term capital gains tax is 20%.
• High-Income Individuals: Previously, shareholders in the highest tax bracket were subjected to a 30% tax on the deemed dividend component of a buyback, which, including surcharge and cess, translated to an effective rate of 35.88%. The move to capital gains could potentially lower this burden, depending on the holding period and other factors.
• Promoters: To discourage the potential misuse of tax arbitrage, promoters will face a higher effective tax on buybacks. Corporate promoters will be subject to an effective tax rate of 22%, while non-corporate promoters will pay 30%.

Rationale Behind the Change

The decision to tax share buybacks as capital gains aims to address certain inequities in the existing system. Previously, taxing the entire buyback amount as a dividend, without considering the cost of acquisition, was seen as unfair. The new rule considers the cost incurred, by taxing the difference between the buyback consideration and the cost of acquiring the shares.

Additional Considerations

The Finance Bill 2026, which proposes this tax change, also includes other significant amendments to the Income Tax Act. These include simplified income tax rules, redesigned tax forms, and integration of accounting standards. A joint committee of the Ministry of Corporate Affairs (MCA) and the Central Board of Direct Taxes (CBDT) will work to incorporate Income Computation and Disclosure Standards (ICDS) into Indian Accounting Standards (IndAS) by the tax year 2027-28, eliminating separate accounting requirements.

The new regulations will take effect from April 1, 2026, applying to the 2026-27 tax year and subsequent years. Taxpayers should consult with financial advisors to understand the implications of these changes for their specific circumstances.