Share Buyback Taxation Comes Full Circle with Return to Capital Gains Model

Buyback of Shares: India’s Tax Framework Comes Full Circle – What the Finance Act, 2026 means for companies, promoters and foreign investors — an analysis of India’s restored capital gains framework for share buybacks.

Summary: The Finance Act, 2026 restores the taxation of share buyback proceeds to the capital gains regime with effect from 1 April 2026, replacing the deemed dividend framework that applied between 1 October 2024 and 31 March 2026. Under the restored system, shareholders are taxed on net capital gains after deducting the cost of acquisition, with gains classified as short-term or long-term based on holding period. A significant feature of the new regime is the introduction of an additional tax specifically for promoter shareholders participating in buybacks, along with a surcharge on that additional tax component. For unlisted companies, even shareholders holding more than 10% of shares or voting rights may be treated as promoters for this purpose. The framework also restores capital loss set-off and carry-forward benefits and allows eligible exemptions under Section 86. For foreign investors, tax outcomes depend on treaty provisions and other factors, making detailed treaty analysis important before participating in buyback transactions. This article examines the legislative evolution of buyback taxation in India, analyses the operative provisions under the Income-tax Act, 2025, and discusses the practical implications for companies, promoters, resident shareholders and non-resident investors.

SECTION 1

A Decade of Legislative Evolution

The journey of buyback taxation in India

When a company buys back its own shares, it is effectively returning capital to shareholders. While the commercial objective of a buyback may be straightforward, the Indian tax treatment of such transactions has undergone multiple significant legislative shifts over the last decade.

The Five Eras of Buyback Taxation

Each of these changes materially affected corporate capital allocation decisions, investor exit strategies, treasury planning and cross-border holding structures. The Finance Act, 2026 marks another major transition by restoring capital gains taxation while simultaneously introducing a differentiated framework for promoter shareholders.

SECTION 2

The 2024 Interim Regime

Buybacks as deemed dividends

The Finance (No. 2) Act, 2024 introduced a deemed dividend framework for taxation of buyback proceeds. Under this regime:

• Shareholders were taxed at applicable income-tax rates on buyback proceeds.
• The company-level buyback tax under Section 115QA was withdrawn.
• Shareholders were permitted consequential capital loss recognition by considering the cost of acquisition separately under the capital gains framework.
• Foreign shareholders, in certain cases, could potentially claim beneficial treaty withholding rates applicable to dividend income.

Although conceptually aimed at aligning taxation with shareholder-level incidence, the framework led to several practical concerns relating to:

• taxation on gross receipts rather than net gains;
• mismatch between dividend taxation and capital loss recognition;
• treaty interpretation issues; and
• economic double taxation concerns.

The Finance Act, 2026 has now replaced this framework with a restored capital gains-based system.

SECTION 3

The Finance Act, 2026 Framework

3.1  Buyback Proceeds Taxable as Capital Gains

With effect from 1 April 2026, buyback proceeds are once again taxable under the capital gains provisions of the Income-tax Act, 2025.

Consequently:

• the cost of acquisition becomes deductible;
• classification into short-term or long-term capital gains depends upon the holding period;
• applicable rates depend on the nature of the shareholder and the shares involved; and
• ordinary capital gains computation provisions become relevant once again.

This restores conceptual symmetry between a buyback transaction and other forms of share transfer.

3.2  Additional Tax Regime for Promoters

One of the most significant features of the Finance Act, 2026 is the introduction of an additional income-tax burden on promoter shareholders participating in buybacks. The legislative framework appears intended to impose an additional incidence on persons exercising significant influence over buyback decisions.

3.2A  Meaning of “Promoter” for Buyback Taxation

For purposes of the additional buyback tax regime, the term “promoter” is defined by reference to different legal frameworks depending upon whether the company is listed or unlisted.

For Listed Companies

In the case of listed companies, the expression “promoter” derives its meaning from the SEBI (Buy-Back of Securities) Regulations, 2018 read with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended from time to time.

Broadly, the definition covers a person who:

• is identified as a promoter in shareholding disclosures;
• exercises direct or indirect control over the affairs of the company; or
• is a person in accordance with whose advice, directions or instructions the Board is accustomed to act.

For Unlisted Companies

For unlisted companies, the definition incorporates two distinct limbs.

Limb A — Companies Act Definition

A person qualifying as a promoter under Section 2(69) of the Companies Act, 2013. Broadly, this includes a person who:

• is identified as a promoter in a prospectus or annual return;
• exercises direct or indirect control over the affairs of the company; or
• influences the Board’s decision-making beyond a professional advisory capacity.

Limb B — 10% Shareholding Threshold

Additionally, any person holding directly or indirectly more than 10% of the shares or voting rights in an unlisted company is also treated as a promoter for purposes of the additional buyback tax provisions. Importantly, this threshold applies independently of formal promoter classification under corporate law disclosures.

3.2B  Practical Compliance Considerations

The expanded promoter framework creates important compliance implications. In particular, shareholders in unlisted companies who are otherwise passive investors may nevertheless fall within the promoter definition solely due to crossing the 10% ownership threshold.

Accordingly, companies contemplating buybacks should review:

• annual return disclosures;
• promoter classifications;
• shareholding pattern filings;
• prospectus and DRHP disclosures; and
• SEBI reporting positions.

3.2C  Additional Tax and Surcharge Mechanics

The additional tax framework operates alongside ordinary capital gains taxation. The surcharge mechanism introduced under the Finance Act, 2026 applies specifically to the additional tax component and not to the entire capital gains liability. This interpretation appears consistent with both the statutory computation framework and subsequent administrative clarification issued after enactment.

Structure of Tax Incidence

Illustrative Effective Tax Rates

*Illustrative only. Actual incidence may vary depending upon surcharge applicability, cess, treaty entitlement, nature of shares, holding period, marginal relief and other special computational provisions.

Worked Illustration — Individual Promoter (LTCG)

Assume an individual promoter tenders shares in a buyback:

• Cost of acquisition: ₹5,00,000
• Buyback proceeds: ₹8,00,000
• Shares held for more than 24 months

Computation

The ordinary capital gains component would continue to remain subject to generally applicable surcharge provisions linked to total income.

SECTION 4

Key Implications for Stakeholders

4.1  Taxation on Net Gains Rather Than Gross Receipts

One of the principal consequences of the restored capital gains framework is that taxation once again applies on net gains after deduction of cost of acquisition. For shareholders with a significant cost base, particularly in mature or privately held companies, this may materially reduce the effective tax burden compared to the earlier deemed dividend regime.

4.2  Capital Loss Set-Off and Carry Forward

Capital losses arising on buyback transactions may generally be:

• set off against eligible capital gains in the same year; and
• carried forward in accordance with applicable provisions.

This restores flexibility in tax planning for both promoters and non-promoter shareholders.

4.3  Section 86 Relief (Corresponding to Erstwhile Section 54F)

Resident shareholders, including promoters, may continue to claim exemption under Section 86 of the Income-tax Act, 2025 (corresponding to erstwhile Section 54F), subject to satisfaction of all prescribed conditions. Where eligible reinvestment conditions are fulfilled, the exemption may substantially reduce or eliminate the capital gains tax liability.

4.4  Inter-Corporate Shareholders and Withdrawal of Dividend Treatment

Under the 2024 deemed dividend framework, domestic corporate shareholders could potentially avail deduction mechanisms applicable to inter-corporate dividends. With the restoration of capital gains taxation from 1 April 2026, those dividend-linked deduction opportunities are no longer available.

4.5  Valuation Considerations in Unlisted Buybacks

Anti-abuse valuation provisions relating to transfer of unquoted shares, including Section 79 of the Income-tax Act, 2025 (corresponding to erstwhile Section 50CA), may require consideration where buyback consideration is below fair market value. Accordingly, companies and shareholders participating in unlisted buybacks should maintain robust valuation support and documentation.

Certain aspects of interaction between special buyback provisions and anti-abuse valuation provisions may continue to evolve through administrative guidance and judicial interpretation.

4.6  Foreign Shareholders and Treaty Considerations

The impact of the Finance Act, 2026 on foreign shareholders requires careful treaty-specific analysis. Under the earlier deemed dividend framework, certain tax treaties potentially allowed lower withholding tax rates on dividend income.

Under the restored capital gains regime, outcomes may vary significantly depending upon:

• treaty provisions;
• acquisition date;
• listed versus unlisted status;
• grandfathering provisions;
• beneficial ownership conditions;
• principal purpose test requirements; and
• substance considerations.

In certain cases, particularly for investments benefiting from grandfathering protections under older treaty structures, the restored capital gains framework may produce more favourable outcomes than the interim dividend regime.

SECTION 5

Broader Policy Perspective

The Finance Act, 2026 restores conceptual alignment by treating buyback transactions under the capital gains framework. The deductibility of acquisition cost, availability of capital loss set-off, and continued exemption mechanisms under reinvestment provisions collectively contribute to a more coherent tax structure.

At the same time, the frequent legislative changes witnessed between 2024 and 2026 highlight the importance of long-term tax stability in corporate capital allocation policy. Corporate treasury decisions, shareholder exit planning and foreign investment structures are often built over multi-year horizons. Repeated structural changes within short periods can create substantial compliance, advisory and transaction costs for both taxpayers and businesses.

The introduction of a promoter-specific additional tax regime also marks an important policy shift by differentiating between controlling and non-controlling shareholders in buyback transactions.

Over time, further administrative guidance and judicial interpretation may provide greater clarity regarding:

• valuation interactions;
• treaty application;
• surcharge mechanics; and
• anti-avoidance considerations.

The Bottom Line

The Finance Act, 2026 restores capital gains taxation for buyback transactions while introducing a differentiated tax framework for promoter shareholders.

For domestic taxpayers, the return to a net-gain taxation model significantly improves conceptual consistency and restores ordinary capital gains planning mechanisms.

For foreign investors, treaty eligibility, grandfathering analysis and substance evaluation become critically important.

For promoters and closely held companies, promoter classification, valuation support and surcharge modelling should be carefully reviewed before undertaking any buyback transaction.

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Disclaimer: This article is intended solely for academic and professional discussion purposes. It does not constitute legal, tax or investment advice. Readers are advised to evaluate specific facts, applicable notifications, rules, judicial precedents and treaty provisions before taking any position or undertaking any transaction.

About the Author: CA Neeraj Taneja is a Partner at RAPG & Co., Chartered Accountants, with a practice focused on direct tax advisory, regulatory representation, litigation support, and corporate tax structuring. He advises businesses and individuals on complex tax and regulatory matters and regularly represents clients before tax authorities and appellate forums.