Pragmatic Shift in Taxation of Buy-Back of Shares
Under the existing provisions of the Income-tax Act, 2025, consideration received by a shareholder on 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.
There is a pragmatic shift to buy-back related taxation.
The Finance Bill 2026 proposes 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 30%, comprising tax payable at the applicable rates together with an additional tax.
There is a significant shift in how buy-back of shares is taxed, moving the burden from the company (as a distribution tax) to the shareholder (as capital gains), with specific provisions for promoters to prevent tax arbitrage.
- Shift from Dividend to Capital Gains: Consideration received by a shareholder on the buy-back of shares will now be chargeable to tax under the head “Capital Gains” instead of being treated as dividend income. The definition of “dividend” in Section 2(40) is amended to exclude buy-back consideration.
- Capital Loss Calculation: The cost of acquisition of the shares extinguished upon buy-back will be recognized as a capital loss for the shareholder.
- Additional Tax on Promoters: To disincentivize tax arbitrage, promoters are subject to an “Additional Income Tax” on the capital gains arising from buy-back. The aggregate tax payable by a promoter is the sum of the normal tax on capital gains plus this additional tax.
- Effective Tax Rates for Promoters:
The Finance Bill 2026 mandates an “Additional Income Tax” for promoters to ensure their effective tax rate matches specific benchmarks (22% or 30%), regardless of whether the shares are listed or unlisted and the same is tabulated as under:
- Promoter is a Domestic Company: The effective tax rate is 22%
- Short-term Capital Gains (STCG):Normal Rate (20%) + Additional Tax (2%)
- Long-term Capital Gains (LTCG):Normal Rate (12.5%) + Additional Tax (9.5%)
- Promoter is other than a Domestic Company: The effective tax rate is 30%.
- STCG: Normal Rate (20%) + Additional Tax (10%).
- LTCG: Normal Rate (12.5%) + Additional Tax (17.5%).
- Effective Tax Rates for Non-Promoters:
For shareholders who are not promoters, the consideration received is taxed as normal Capital Gains without the “Additional Income Tax” component.
- Non-Promoter ((Corporates & Non-Corporates and Non- Resident)
- STCG: Normal Rate (20%)
- LTCG: Normal Rate (12.5%)
The above tax rates are exclusive of applicable surcharge and cess.
The distinction between listed and unlisted shares primarily affects the holding period to determine STCG vs LTCG, but the Finance Bill 2026 standardizes the rates for STCG (20%) and LTCG (12.5%) across various asset classes for the purpose of buy-back taxation calculations. Entire consideration received on buy back is now chargeable under the head “Capital Gains” and is excluded from the definition of “Dividend”. The cost of acquisition of the shares extinguished upon buy-back is recognized as a capital loss. The definition of Promoter is as defined in SEBI (Buy-Back of Securities) Regulations, 2018 for listed companies and for unlisted Companies, the promoter is defined as per Section 2(69) of the Companies Act, 2013, or a person holding (directly/indirectly) more than 10% shareholding.
Effectively, the taxation for buyback has increased for non-promoter shareholders has been reduced to 20% /12.5 which otherwise the consideration for buyback was taxed as dividends as per applicable tax rates (25.17% under the new regime for corporates and 35.88% for individuals). This would now again promote buy-backs which otherwise the participation in last one year has been gone to back burner due to higher taxation.
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