Budget 2026 Reshapes Buyback Tax: Capital Gains Return, Promoters Face New Levy

A Major Shift in Shareholder Payouts

In a significant policy overhaul, Union Budget 2026, presented by Finance Minister Nirmala Sitharaman, has fundamentally altered the taxation framework for share buybacks. The new proposal reverts the tax treatment for all shareholders to a capital gains regime, ending the short-lived system where buyback proceeds were taxed as dividend income. Simultaneously, the budget introduces a new, additional tax on promoters to eliminate tax arbitrage opportunities, aiming for a more equitable system of corporate profit distribution.

The Rationale: Curbing Arbitrage and Protecting Investors

The primary objective behind this change is twofold. First, the government aims to close a loophole that encouraged listed companies to favour share buybacks over dividends as a method of distributing profits to shareholders, particularly promoters, at a lower tax incidence. Second, the move provides significant relief and clarity to minority and retail shareholders, who were adversely affected by the previous rules introduced from October 1, 2024.

Under the 2024 rules, the entire amount received by a shareholder from a buyback was treated as dividend income and taxed at their applicable slab rate, which could be as high as 30% plus surcharges. The new capital gains treatment is widely seen as a more logical and favourable approach for the average investor.

How Retail Investors Benefit

For non-promoter shareholders, the return to a capital gains framework is a welcome development. The tax liability will now be calculated only on the profit portion of the transaction, not the entire proceeds.

For example, if an investor bought 100 shares at ₹700 each and tenders them in a buyback at ₹1,000 per share, the total gain is ₹30,000 (₹1,00,000 proceeds minus ₹70,000 cost). This ₹30,000 will be taxed as either short-term or long-term capital gains, depending on the holding period. This is a clear advantage over the previous system where the entire ₹1,00,000 would have been added to their income and taxed at their slab rate.

The Capital Loss Provision Retained

A crucial element of relief that continues from the old regime is the treatment of the acquisition cost. The cost of shares tendered in a buyback is treated as a capital loss. This loss can be set off against other capital gains in the same financial year or carried forward for up to eight subsequent years. This provision prevents what experts called a 'phantom loss,' where the cost base was unusable against the dividend income under the 2024 rules.

Rohit Jain, Managing Partner at Singhania & Co., noted, "The government has restored the true character of buybacks as a capital transaction rather than a profit distribution. This move eliminates the 'phantom loss' trap... For minority shareholders, this translates into higher post-tax returns."

The New Levy on Promoters

To ensure that buybacks do not become a preferred route for tax-efficient profit extraction by promoters, the Finance Minister proposed an additional buyback tax specifically for this group. This measure effectively levels the playing field between dividends and buybacks from a promoter's tax perspective.

The new structure imposes an effective tax rate of approximately:

• 22% for corporate promoters
• 30% for non-corporate promoters

This additional tax is levied on the gains made by the promoter from tendering their shares in the buyback, over and above the standard capital gains tax.

Summary of Tax Rule Changes

Feature	Pre-Budget 2026 (From Oct 1, 2024)	Post-Budget 2026 Proposal
Tax Treatment for All Shareholders	Taxed as Dividend Income	Taxed as Capital Gains
Applicable Tax Rate	Individual's slab rate	STCG or LTCG rates
Tax on Promoters	Same as other shareholders	Capital Gains Tax + Additional Buyback Levy
Treatment of Acquisition Cost	Becomes a Capital Loss	Becomes a Capital Loss (can be set off)

Expert Analysis and Market Reaction

Analysts have largely lauded the move for its clarity and fairness towards minority shareholders. Kunal Savani, Partner at Cyril Amarchand Mangaldas, stated, "In a big relief to minority shareholders, now buyback of shares will again be taxed as capital gains tax... However, this gets complicated for promoters, as they will have to pay additional tax on such buy back."

The change aligns India's buyback taxation more closely with global practices where such transactions are typically treated as capital events. "By aligning buyback taxation with capital gains rules, the move reduces inconsistencies, brings more transparency, and provides companies and investors with greater clarity," said Rajarshi Dasgupta, Executive Director – Tax at AQUILAW.

Conclusion: A More Balanced Framework

The Union Budget 2026 proposals on share buyback tax represent a significant step towards creating a more balanced, transparent, and equitable tax regime for shareholder returns. For retail investors, it marks a return to a familiar and often more beneficial capital gains system. For promoters and companies, it closes a tax arbitrage route, encouraging them to evaluate payout methods based on corporate strategy rather than tax considerations alone. The final implementation details will be watched closely by the market as they will shape corporate payout policies for years to come.