Buyback Taxation in India: Evolution from Early Provisions to Budget 2026 Reforms

1. Introduction

A share buyback refers to the purchase by a company of its own shares from existing shareholders. Buybacks are commonly used by companies to return surplus cash to investors, improve earnings per share, and signal financial strength. The taxation of buybacks in India has undergone significant transformation over the years, moving from company-level taxation to shareholder-level taxation and now to a capital gains-based regime.

2. Early Buyback Taxation Framework (Pre-2024)

Prior to the amendments introduced in 2024, buybacks were governed primarily by Section 115QA of the Income-tax Act, 1961. Under this regime, the company undertaking the buyback was liable to pay Buyback Distribution Tax.

Key features of the earlier regime:

• Tax was levied at 20% (plus applicable surcharge and cess) on the distributed income, being the difference between buyback price and issue price of shares.
• The tax incidence was on the company, not the shareholder.
• Shareholders received the buyback proceeds as exempt income in their hands.

This structure ensured simplicity for shareholders but increased the tax burden on companies. Over time, concerns were raised that buybacks were being used as an alternative to dividend distribution, potentially resulting in tax arbitrage.

3. Budget 2024 Amendment – Dividend Treatment

The Finance Act, 2024 introduced a major shift effective 1 October 2024. Buyback proceeds were treated as ‘deemed dividend’ in the hands of shareholders.

• Salient aspects of the 2024 regime:
• The entire consideration received on buyback was taxable as dividend income at the shareholder’s applicable slab rate.
• The cost of acquisition of the shares was allowed as a capital loss separately.
• Capital loss could be set off only against capital gains, subject to normal provisions.

This created practical difficulties. Even if the actual economic gain was small, tax was levied on the full buyback consideration. Retail investors without sufficient capital gains could not effectively utilise the capital loss, leading to higher effective taxation.

4. Union Budget 2026 Reform – Capital Gains Regime Restored

Recognising the distortions caused by the dividend-based regime, Union Budget 2026 proposed a comprehensive reform effective 1 April 2026.

Key changes introduced:

• Buyback proceeds to be taxed as Capital Gains instead of dividend income.
• Capital gain to be computed as: Buyback Consideration minus Cost of Acquisition.
• Long-Term Capital Gains (holding period > 12 months for listed shares) taxable at applicable LTCG rates.
• Short-Term Capital Gains taxable at applicable STCG rates.

Additionally, specific provisions were introduced to prevent promoter-level tax arbitrage, ensuring parity between different classes of shareholders. The summary of revised tax rate for buyback is given below:-

5. Reasons for the 2026 Changes

1. Correcting Structural Distortion: Taxing entire proceeds as dividend was inconsistent with the principle of taxing real income.

2. Protecting Minority Shareholders: Retail investors faced disproportionately high effective taxation under the 2024 regime.

3. Preventing Tax Arbitrage: Ensuring buybacks are not used as a tool for tax-efficient profit extraction by promoters.

4. Simplification and Alignment: Restoring the capital gains framework aligns buybacks with normal share sale taxation principles.

6. Conclusion

The evolution of buyback taxation in India reflects the Government’s effort to balance revenue considerations, equity among taxpayers, and market efficiency. The shift from company-level taxation to dividend treatment and now back to capital gains demonstrates a policy correction aimed at fairness and economic rationality. The 2026 reforms are expected to enhance transparency, reduce litigation, and promote investor confidence in capital markets.

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Article is authored by CA Sajjan Tanwar, Associate and is co-authored  by CA Ankur Mehta, Partner at A M S M Associates, Chartered Accountants, Pune

CA Sajjan Tanwar	CA Ankur Mehta