Union Budget 2026: FM Nirmala Sitharaman proposes taxing buyback proceeds as capital tax — All you need to know

During today's Union Budget 2026-27, Finance Minister Nirmala Sitharaman proposed that buyback proceeds for all types of shareholders will be taxed as capital gains, marking a major overhaul of the previous rule. She added, however, that promoters will pay an additional buyback tax.

Under the previous rule, effective from 1 October 2024, all amounts received by shareholders from a buyback were treated as a “deemed dividend” and taxed at the individual's applicable slab rate, instead of being taxed as capital gains.

Even though Buyback was presently taxed as dividend, the extinguishment of share was treated as capital loss, which posed problems to small shareholders who had no capital gains to set off the loss.

“In a big relief to minority shareholders, now buyback of shares will again be taxed as capital gains tax and hence long term shares tendered in buyback will be taxed only at 12.5% as against the normal slab rate,” said Kunal Savani, Partner at Cyril Amarchand Mangaldas.

What does it mean for promoters?

According to Savani, this initiative could create complications for promoters, as they will have to pay additional tax on such a buyback, resulting in an effective tax rate of 30% plus surcharge.

“Same stream of income will now be taxed differently,” he said.

Meanwhile, Rohit Jain, Managing Partner at Singhania & Co., hailed the move, stating that “reverting the tax treatment of share buybacks from ‘deemed dividends’ to Capital Gains is quite positive for the retail investor.”

He added that the government has restored the “true character” of buybacks as a capital transaction rather than a profit distribution channel.

Higher post-tax returns for minority shareholders

According to Jain, this move also eliminates the “phantom loss” trap, where acquisition costs could not previously be set off against dividend income. The phantom loss trap refers to tax liabilities that arise from investment gains allocated to an investor but never received in cash.

He also outlined the decision's impact on minority shareholders, explaining that the proposal translates into “higher post-tax returns and reinforces India’s position as a mature, investor-aligned capital market.”

How is tax on buyback of shares calculated?

The tax on buyback of shares is calculated by measuring the difference between what the company pays shareholders when it buys back the shares and the amount it originally received when those shares were first issued.

Since in the open market it is difficult to calculate tax every time shares change hands, the tax on buybacks is determined based on the gap between the buyback price and the original issue price, regardless of the market value at which investors purchased the shares.

Until 30 September 2024, this tax was the company’s responsibility. However, from 1 October 2024, the government directed that companies would no longer pay tax on buybacks. Instead, shareholders are taxed on the full amount they receive, which is treated as dividend income under Section 2(22)(f) of the Income‑tax Act.

Since buyback conceptually is in nature of capital gains, hence in Finance Bill 2026, buyback treatment is changed to capital gains, clarified Income Tax Department.