The taxation framework for buyback of shares is set to undergo a significant change from 1st April 2026, with the government proposing a shift from dividend-based taxation to capital gains taxation under the Income tax Act, 2025. The move aims to rationalise the existing structure and address concerns around differential tax outcomes, especially for promoters.
Current Tax Treatment of Share Buybacks
Under the existing provisions of the Income tax Act, 2025:
- Any consideration received by a shareholder on buyback of shares is treated as dividend income under section 2(40)(f).
- Such dividend income is taxed at the applicable slab rates in the hands of shareholders.
- Separately, the cost of acquisition of shares extinguished on buyback is recognised as a capital loss under section 69, which can be carried forward or set off as per capital loss provisions.
This dual treatment has long been criticised for being complex and economically inefficient, as it taxes receipts as income while recognising losses in a different head.
Proposed Shift to Capital Gains Taxation
To streamline taxation and align buyback transactions with their economic substance, the government has proposed that:
- Consideration received on buyback of shares will be taxed under the head "Capital Gains", instead of being treated as dividend income.
- This change eliminates the artificial separation between dividend income and capital loss, bringing clarity and uniformity to the tax treatment.
The amendment reflects a broader policy intent to simplify tax laws and reduce interpretational disputes.
Higher Tax Liability for Promoters
Recognising the distinct role and influence of promoters in corporate decision-making particularly in structuring buyback transactions, the proposal introduces a differential tax treatment :
- In the case of individual promoters, the effective tax rate on gains from buyback will be 30%, comprising tax at applicable rates along with an additional tax component.
- For promoter companies, the effective tax liability will be 22%.
This measure is aimed at preventing tax arbitrage and ensuring that promoters do not disproportionately benefit from buyback arrangements.
Effective Date and Applicability
- The proposed amendments will come into force from 1 April 2026.
- They will apply from Tax Year 2026–27 onwards.
The changes are introduced through Clauses 27 and 34 of the relevant legislation.
What This Means for Investors and Companies
For non-promoter shareholders, the move to capital gains taxation could result in a more logical and predictable tax outcome, especially in cases involving long-term holdings. For promoters, however, buyback strategies may need reassessment due to the higher effective tax rates.
Overall, the proposal marks a decisive step towards simplification, transparency, and equity in the taxation of corporate buybacks—an area that has historically been fraught with complexity and litigation.
Official copy of the Clause is as follows
Taxation of buyback of shares
Under the existing provisions of the Income-tax Act, 2025, consideration received by a shareholder on the buy-back of shares by a company is treated as dividend income under section 2(40)(f) of the Act and taxed accordingly, while the cost of acquisition of the shares extinguished on buy-back is recognised separately as a capital loss under Section 69.
2. It is proposed to rationalise the taxation of share buy-backs by providing that consideration received on buy-back shall be chargeable to tax under the head "Capital gains" instead of being treated as dividend income. Further, having regard to the distinct position and influence of promoters in corporate decision-making, particularly in relation to buy-back transactions, it is proposed that, in the case of promoters, the effective tax liability on gains arising from buy-back shall be thirty per cent, comprising tax payable at the applicable rates
together with an additional tax. In case of promoter companies, the effective tax liability will be 22%.
3. These amendments shall take effect from the 1st day of April, 2026, and shall apply in relation to the tax year 2026-27 and subsequent tax years.
[Clauses 27 and 34]
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