Finance minister Nirmala Sitharaman announced a major overhaul of the tax treatment of share buybacks today, marking a shift in how India taxes capital returns

Under the new regime, the effective tax rate on share buyback gains will be 22% for promoters which are domestic companies and 30% for promoters which are not domestic companies

The announcement was one of the most consequential capital market reforms in the Union Budget 2026-27, with implications for listed companies, promoters, retail investors and future capital allocation strategies

Finance minister Nirmala Sitharaman announced a major overhaul of the tax treatment of share buybacks today, marking a shift in how India taxes capital returns. The changes are aimed at curbing tax arbitrage while protecting minority shareholders.

Under the new regime, the effective tax rate on share buyback gains will be 22% for promoters which are domestic companies and 30% for promoters which are not domestic companies.

The announcement was one of the most consequential capital market reforms in the Union Budget 2026-27, with implications for listed companies, promoters, retail investors and future capital allocation strategies.

“Under the earlier framework, a shareholder who bought a share at INR 500 and tendered it in a buyback at INR 800 was taxed on the full INR 800, even though the real gain was only INR 300. The shift to capital gains taxation corrects this distortion by taxing only the profit after adjusting for acquisition cost, which materially improves outcomes for retail and minority shareholders,” said Jay Prakash Gupta, founder and CEO of stock broking unicorn Dhan.

Capital Gains For All, Higher Tax For Promoters

Under the new proposal, consideration received on share buybacks will be taxed as capital gains for all shareholders, aligning buybacks with regular secondary market share sales. This means tax will apply only on the actual profit earned, calculated as the difference between the buyback price and the acquisition cost.

For ordinary retail and minority shareholders, this is a significant improvement in clarity and fairness. Losses arising from buybacks can be set off or carried forward, and tax will no longer be levied on gross receipts.

In most cases, long-term investors may face lower effective tax rates compared to the earlier dividend-style treatment.

However, promoters will face an additional layer of taxation. The Budget introduced a differentiated regime where promoter gains from buybacks will attract a higher effective tax rate. Promoters who are domestic companies will pay an effective 22% tax, while non-domestic company promoters will pay 30%.

This is intentionally higher than standard long-term capital gains tax (12.5%) and is designed to neutralise the incentive to use buybacks purely as a tax arbitrage mechanism.

The distinction between promoter and non-promoter shareholders is central to the reform. While all shareholders will be taxed under the same capital gains framework, only promoters will face the punitive overlay.

However, Siddharth Pai, founding partner of 3one4 Capital, holds a different view. While welcoming the move to tax buybacks as capital gains, Pai flagged concerns around the breadth of the promoter definition used for imposing the higher tax.

He pointed out that the framework borrows from SEBI and the Companies Act but also extends promoter classification to shareholders holding more than 10% stake in a company, regardless of whether they exercise control.

According to Pai, this risks conflating financial ownership with operational control. Several PE and VC funds often hold stakes above this threshold without having any influence over capital allocation decisions like buybacks.

Treating such investors at par with controlling promoters, he argued, could lead to unintended consequences and dampen the attractiveness of share buybacks as a liquidity route for long-term financial shareholders.

Pai added that without a clear distinction between investors who control the enterprise and those who are purely financial participants, the policy risks penalising scale rather than intent, an outcome that may run counter to the stated objective of curbing promoter misuse rather than discouraging institutional capital.

How Was Share Buyback Taxed Earlier?

Share buybacks are a corporate finance tool that allow companies to return excess cash to shareholders while reducing outstanding equity. However, over the past decade, buybacks increasingly replaced dividends, especially among promoter-led companies. The reason was taxation.

Before October 2024, share buybacks in India were taxed at the company level through a buyback distribution tax, while shareholders paid no tax on the proceeds – a structure that favoured promoters.

Dividends, by contrast, were taxed in the hands of shareholders at their applicable slab rates, making them far less attractive for high-income promoters.

From October 1, 2024, the government attempted to correct this by treating buyback proceeds as dividend income in the hands of shareholders. While this addressed some arbitrage, it created new distortions.

Shareholders were taxed on the entire buyback amount rather than on actual gains, cost of acquisition could not be fully adjusted, and losses could not be easily set off. Retail and minority shareholders were often worse off, while promoters still retained flexibility via ownership structures. It is this which prompted the FM to overhaul the tax structure today.

Edited by Vinaykumar Rai