Taxation of Buy-back of Shares: What Changed in Budget 2026?
The Union Budget 2026 has made a significant structural change in the taxation of share buy-backs. The earlier approach, where buy-back proceeds were treated as dividend income, has now been rationalised. From Tax Year 2026-27 onwards, buy-back income will be taxed under the Capital Gains head, bringing clarity and alignment with economic reality.
This change is especially relevant for promoters, shareholders of closely held companies, and corporate groups, where buy-backs are frequently used as a mode of distribution.
How Buy-back Was Taxed Earlier?
Under the earlier provisions of the Income-tax Act, the consideration received by a shareholder on buy-back of shares was treated as dividend income under section 2(40). Accordingly, it was taxed in the hands of the shareholder at applicable dividend tax rates.
At the same time, the cost of acquisition of shares extinguished on buy-back was allowed separately as a capital loss under section 69. This resulted in a fragmented tax treatment, income was taxed as dividend, while cost was recognized elsewhere, often leading to mismatches and ineffective loss utilization.
What Has Changed in Budget 2026?
Budget 2026 proposes to shift the entire taxation of buy-back transactions to the head “Capital Gains”. This means the buy-back consideration will no longer be treated as dividend income.
Instead, capital gains will be computed in the normal manner by reducing the cost of acquisition from the buy-back price, ensuring a single, coherent tax treatment.
This amendment aims to simplify compliance and reflect the true nature of buy-back transactions as a transfer of shares.
Buy-back Gains: LTCG or STCG. How Will They Be Taxed?
Under the new provisions introduced in Budget 2026, consideration received on buy-back of shares will be taxable under the head “Capital Gains”. The nature of the capital gain will depend on the period of holding of the shares, just like any other transfer.
Short-Term Capital Gain (STCG) – if shares are held for a period not exceeding the prescribed holding period
Long-Term Capital Gain (LTCG) – if shares are held beyond the prescribed holding period
Accordingly, the applicable capital gains tax rates will apply.
Applicable Capital Gains Tax Rates on Buy-back
Listed Shares
STCG: Taxed at 20%
LTCG: Taxed at 12.5% (subject to applicable conditions)
Unlisted Shares
STCG: Taxed at applicable slab rates
LTCG: Taxed at 20% with indexation
These rates apply unless a specific higher effective tax is prescribed for promoters, as discussed below.
Special Tax Treatment for Promoters
While capital gains taxation is based on holding period, the Budget introduces a special effective tax framework for promoters participating in buy-back transactions:
Promoter Individuals: Effective tax liability capped at 30%
Promoter Companies: Effective tax liability capped at 22%
This operates as an override, meaning even if the capital gains rate is lower (for example, LTCG at 12.5%), the effective tax on promoters will align with the prescribed rate through an additional tax mechanism.
This provision is aimed at preventing tax arbitrage in controlled buy-back decisions.
Example – Earlier vs Proposed
Example 1:
Earlier Tax Treatment (Before Budget 2026)
Buy-back price received: ₹10,00,000
Cost of acquisition of shares: ₹6,00,000
Tax impact:
₹10,00,000 taxed as dividend income
₹6,00,000 recognized separately as capital loss
This often resulted in higher immediate tax outflow and difficulty in utilizing the capital loss.
New Tax Treatment (From Tax Year 2026-27)
Buy-back price received: ₹10,00,000
Cost of acquisition: ₹6,00,000
Capital Gains Computation:
Capital Gain = ₹10,00,000 – ₹6,00,000 = ₹4,00,000
Tax payable:
For Promoter Individual: ₹4,00,000 × 30% = ₹1,20,000 (approx.)
For Non-Promoter Shareholder: ₹4,00,000 * 12.5% = ₹50,000 (approx.). (Assumed as Long term Listed shares. If it is a short term listed shares, tax rate would be 20%)
The entire transaction is now taxed cleanly under capital gains, with cost adjustment built in.
Example in Tabular format covering all the possible scenarios:
- Buyback Consideration: ₹10,00,000
- Cost of Acquisition: ₹6,00,000
- Capital Gain: 10,00,000 - 6,00,000 = ₹4,00,000
SL No | Category | Nature of Shares | Asset Type | Applicable Tax Rate | Tax on ₹4,00,000 gain |
|---|---|---|---|---|---|
1 | Promoter (Individual) | Listed / Unlisted | Any | 30% (Effective) | ₹1,20,000 |
2 | Promoter Company | Listed / Unlisted | Any | 22% | ₹88,000 |
3 | Non-Promoter | Listed | Long-term | 12.5% | ₹50,000 |
4 | Non-Promoter | Listed | Short-term | 20% | ₹80,000 |
5 | Non-Promoter | Unlisted | Long-term | 12.5% (Without Indexation*) | ₹80,000 |
6 | Non-Promoter | Unlisted | Short-term | Slab Rates | As per Slab |
Important Notes (keep below the table)
The promoter tax rates (30% / 22%) override normal capital gains rates, irrespective of holding period.
For listed shares, holding period determines whether the gain is LTCG (12.5%) or STCG (20%).
For unlisted shares, LTCG is taxable at 12.5% without indexation.
Surcharge and cess apply over and above the rates shown.
Applicable from Tax Year 2026-27 onwards.
When Does This Change Apply?
These amendments will take effect from 1 April 2026 and will apply for Tax Year 2026-27 and subsequent years. Buy-backs executed prior to this date will continue to be taxed by the earlier provisions.
Key Takeaway for Shareholders
The Budget 2026 reform marks a fundamental shift in buy-back taxation. By moving buy-back income from dividend taxation to capital gains, the law now provides greater clarity, better alignment with commercial substance, and reduced litigation risk.
However, promoters and companies must carefully evaluate the effective tax cost before opting for buy-backs as a distribution strategy going forward.
Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. Tax implications may vary based on facts and circumstances. Professional advice should be sought before taking any action.