FM Nirmala Sitharaman changes share buybacks tax rules, investors to pay capital gains tax

"It is proposed to provide that the 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 that are domestic companies and 30% for promoters other than domestic companies," said FM Nirmala Sitharaman.

“Classifying share buyback proceeds as capital gains for all shareholders is a welcome step toward simplifying the tax framework. 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, AQUILAW.

What was the earlier rule on share buybacks?

Under the tax provisions applicable from October 1, 2024, the amount received by shareholders from a share buyback was treated as a “deemed dividend” under the Income Tax Act, 1961.

Key features of the earlier rule:

• Entire buyback proceeds were taxable, not just the profit portion.

• Income from buyback was classified as “Income from Other Sources.”

• Tax was levied at the individual’s applicable income tax slab rate.

For example, investors in the 30% slab paid tax at 30% on the full amount received.

What the new buyback rule means for taxpayers

The change in taxation of share buybacks announced in Budget 2026 means that investors will now be taxed only on the actual gains they make, rather than on the entire amount received. Earlier, buyback proceeds were treated as deemed dividend and taxed at the individual’s slab rate without allowing any deduction for the cost of shares. Under the new rule, buyback income will be classified as capital gains, allowing investors to deduct the purchase price and pay tax only on the profit component.

For taxpayers, this brings significant relief, especially for long-term investors and those in higher tax brackets. The tax liability will now depend on the holding period and applicable capital gains rates, aligning buybacks with normal share sale transactions. Overall, the move corrects an investor-unfriendly provision and makes the taxation of buybacks more equitable and predictable.

The Finance Minister also proposed to raise Securities Transaction Tax to 0.05 per cent on commodity futures from 0.02 per cent.

She further said MAT (Minimum Alternate Tax ) will be made final tax and the rate will be reduced to 14 per cent from current 15 per cent.