Budget 2026 Income Tax: As you all know that yesterday i.e. on 1 February 2026, Finance Minister Nirmala Sitharaman presented the budget for 2026-27. After which the Income Tax Department has given clarification on how the “Buyback Tax” has been changed for the benefit of small shareholders with the Union Budget 2026. Finance Minister Nirmala Sitharaman, in her budget speech yesterday, proposed to shift the buyback tax from dividend treatment back to the capital gains framework, applicable from 2024.

Income Tax Department gave clarification

Regarding this, the Income Tax Department said, “Buybacks were currently taxed as dividends, but redemption of shares was considered a capital loss. This caused problems to small shareholders, who had no capital gains to offset the losses.” “Also, buybacks are similar in concept to capital gains.” In effect, retail shareholders will now pay buyback tax at capital gains tax rates of 12.5% ​​for long-term capital gains and 20% for short-term capital gains. Under the dividend system, shareholders were taxed according to their income tax slab, which could be up to 30%.

What are liquidating shares?

Liquidation of shares is a legal process in which a listed company destroys or cancels the shares purchased from shareholders. The company is legally bound to destroy these shares physically or electronically within 7-15 days. This reduces the total share capital of the company, thereby increasing the promoter’s stake and earnings per share for the remaining shareholders.

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Why was liquidation of shares considered a capital loss?

The concept of “capital loss” came after the transition of buyback tax to dividend system on October 1, 2024. The government wanted to treat the money received from buyback as dividend. Now, dividends are fully taxed, as per the income tax slab, without considering the price an investor actually paid for the shares. After all, this stock will expire in a few weeks. This seemed unfair.

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