Budget 2026 Overhauls Buyback Tax: Capital Gains for All, Special Levy for Promoters

A Major Shift in Shareholder Taxation

In a significant policy overhaul, Union Budget 2026, presented by Finance Minister Nirmala Sitharaman, has fundamentally changed how share buybacks are taxed in India. The new proposal shifts the taxation framework for all shareholders to a capital gains regime, while simultaneously introducing an additional levy on promoters. This move is designed to level the playing field between dividends and buybacks, curb tax arbitrage opportunities, and offer greater protection to minority shareholders.

The New Buyback Tax Regime Explained

Under the rules proposed in Budget 2026, any profit an investor makes from tendering shares in a buyback will be treated as a capital gain. This gain will be classified as either short-term or long-term, depending on the holding period of the shares, and taxed accordingly. This marks a clear departure from the system implemented on October 1, 2024, which treated the entire buyback proceeds as dividend income, taxable at the investor's slab rate.

For a retail investor, the new system simplifies the calculation. For instance, if an investor bought 100 shares at ₹700 each (total cost ₹70,000) and tendered them in a buyback at ₹1,000 per share (total proceeds ₹1,00,000), the resulting ₹30,000 profit is now straightforwardly taxed as a capital gain.

A Special Levy to Discourage Promoter Arbitrage

The most targeted change in the budget is the introduction of an additional buyback tax specifically for promoters. The government's rationale is to disincentivize the use of buybacks as a tool for promoters to extract profits at a lower tax rate compared to dividends. This new levy will be applied on top of the standard capital gains tax.

The effective tax rates for promoters under this new structure are:

• Corporate Promoters: Approximately 22%
• Non-Corporate Promoters: Approximately 30%

This measure ensures that distributing profits via buybacks is no longer a significantly more tax-efficient route for promoters than declaring dividends.

How the New Rules Compare to the Previous System

The latest announcement reverses the changes made in 2024, which had shifted the tax liability from companies to shareholders but classified the income as dividends. The new framework is a return to a capital gains model, but with a crucial distinction for promoters.

Feature	Pre-Budget 2026 (from Oct 2024)	Post-Budget 2026 Proposal
Tax Treatment for Shareholder	Taxed as Dividend Income	Taxed as Capital Gains
Applicable Tax Rate	Individual's Income Tax Slab Rate	Capital Gains Rate (STCG/LTCG)
Promoter-Specific Tax	None	Additional Levy (22% or 30%)
Cost of Acquisition	Treated as Capital Loss	Treated as Capital Loss (Provision Retained)
TDS by Company	Yes (10% for residents, 20% for non-residents)	To be handled by shareholder under capital gains

Key Relief: Treatment of Capital Loss Retained

A critical provision that remains unchanged is the treatment of the acquisition cost. If an investor tenders shares in a buyback at a price lower than their purchase price, the resulting loss will be treated as a capital loss. This loss, whether short-term or long-term, can be set off against other capital gains or carried forward for up to eight assessment years. This continuity provides significant relief and a mechanism for investors to manage their overall tax liability.

Expert and Market Reaction

Financial experts have largely viewed the move as a positive step towards rationalisation. Gouri Puri, Partner at Shardul Amarchand Mangaldas and Co., noted, "The Buyback tax scheme seeks to draw a distinction between promoter and non-promoter shareholders. Capital gains tax treatment seems to be restored for non-promoter shareholders." Amit Gupta, Partner at Saraf and Partners, called the recalibration to capital gains a "welcome change" that would pacify taxpayer concerns.

The broader market, however, reacted negatively on budget day, primarily due to a separate announcement regarding a steep hike in the Securities Transaction Tax (STT) on futures and options, which overshadowed the buyback tax reforms.

Impact on Investors and Companies

For minority and retail shareholders, the shift to a capital gains regime is beneficial. It provides clearer tax outcomes and could result in a lower tax liability, especially for long-term investors who can benefit from lower LTCG rates compared to their higher income tax slabs.

For promoters, the new levy significantly increases the tax cost of participating in a buyback, aligning it more closely with the tax on dividends. This will likely influence corporate decisions on how to return surplus cash to shareholders, potentially making dividends a more attractive option for companies where promoters hold a significant stake.

Conclusion: A More Balanced Payout Policy

The Union Budget 2026 proposals for buyback taxation aim to create a more equitable and transparent system for shareholder payouts. By reintroducing the capital gains framework for all investors and adding a deterrent for promoter-led tax arbitrage, the government seeks to close loopholes and encourage a balanced approach to corporate profit distribution. The final implementation details will be watched closely by companies and investors as they adjust their financial strategies.