Decoded: Share buybacks to be taxed as capital gains under Budget 2026

If you hold shares in companies that regularly announce buybacks, the Union Budget 2026–27 brings an important—and largely positive—change for you.

 

In the Budget presented on February 1, Nirmala Sitharaman proposed a complete overhaul of how share buybacks are taxed, aiming to remove confusion and close tax loopholes.

 

"It is proposed to provide that consideration received by a  shareholder on buy-back shall be chargeable to tax under the  head “Capital Gains” instead of being treated as dividend income.  It is also proposed to provide for a differential rate for promoters  wherein the effective rate on gains in buyback will be 22% for  promoters which are domestic companies and 30% for promoters  other than domestic companies," said the FM.

 

 

Until now, buybacks were taxed differently depending on structure, often leading to uncertainty for investors and planning challenges for companies. Under the new proposal, any money you receive from a share buyback will be taxed as capital gains, instead of being treated as dividend income.

 

For most retail investors, this means greater clarity and predictability. Capital gains rules are familiar, easier to understand, and already part of regular investment planning. You’ll know upfront how your buyback proceeds will be taxed, making it simpler to compare buybacks with dividends or market sales.

 

There is, however, a distinction for promoters. The Budget proposes a differential tax rate on buyback gains:

 

22% effective tax for promoters that are domestic companies

 

30% effective tax for promoters that are non-domestic companies

 

This differentiation is aimed at reducing tax arbitrage while keeping India’s corporate payout framework fair and transparent.

 

"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. However, this get complicated for promoters, as they will have to pay additional tax on such buy back, resulting in effective tax rate of 30% plus surcharge. Same stream of income will now be taxed differently," said Kunal Savani, Partner, Cyril Amarchand Mangaldas.

 

"By aligning buyback taxation with capital gains rules, the move reduces inconsistencies, brings more transparency, and provides companies and investors with greater clarity when planning buybacks. Clearer guidelines like this can improve market efficiency and boost investor confidence as India’s capital markets continue to grow," said Rajarshi Dasgupta, Executive Director – Tax at AQUILAW.

 

For investors, the broader takeaway is reassuring: buybacks are no longer a tax grey area. 

 

"The government has restored the true character of buybacks as a capital transaction rather than a profit distribution.

 

This move eliminates the 'phantom loss' trap, where acquisition costs were previously unusable against dividend income. For minority shareholders, this translates into higher post-tax returns and reinforces India’s position as a mature, investor-aligned capital market," said Rohit Jain, Managing Partner, Singhania & Co.