In a significant policy shift, the Finance Bill 2026 has proposed a comprehensive change in the taxation framework for share buy-backs, moving the tax incidence from dividend income to capital gains in the hands of shareholders. The move is aimed at rationalizing the current structure while plugging potential tax arbitrage, particularly for promoters.
From Dividend to Capital Gains: A Structural Shift
Under the existing provisions of the Income-tax Act, 2025, any consideration received by a shareholder on buy-back of shares by a company is treated as dividend income under Section 2(40)(f). The amount received is taxed accordingly at applicable rates in the hands of the shareholder. Simultaneously, the cost of acquisition of the extinguished shares is recognised separately as a capital loss under Section 69.
The Finance Bill 2026 proposes a pragmatic shift. The consideration received on buy-back will now be taxed under the head “Capital Gains”, and correspondingly, the definition of “dividend” under Section 2(40) is amended to exclude buy-back consideration.
This effectively ends the dividend-based taxation model for buy-backs and aligns such transactions with standard capital gains treatment.
Entire Consideration Taxable as Capital Gains
Under the proposed framework:
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The entire consideration received on buy-back will be chargeable under the head “Capital Gains”.
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The cost of acquisition of the shares extinguished will be recognized as capital loss for the shareholder.
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The distinction between listed and unlisted shares will primarily affect the holding period for determining Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), but tax rates are standardized for buy-back purposes.
The Finance Bill 2026 standardises capital gains tax rates for buy-back transactions at:
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STCG: 20%
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LTCG: 12.5%
These rates are exclusive of applicable surcharge and cess.
Additional Tax Burden on Promoters
Recognising the distinct role and influence of promoters in corporate decision-making, particularly in buy-back decisions, the government has introduced an “Additional Income Tax” component for promoters to prevent tax arbitrage.
The total effective tax liability for promoters will be aligned with specified benchmarks — 22% or 30% — depending on their status.
1. Promoter is a Domestic Company – Effective Tax Rate: 22%
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STCG:
Normal Rate (20%) + Additional Tax (2%) = 22% -
LTCG:
Normal Rate (12.5%) + Additional Tax (9.5%) = 22%
2. Promoter other than Domestic Company – Effective Tax Rate: 30%
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STCG:
Normal Rate (20%) + Additional Tax (10%) = 30% -
LTCG:
Normal Rate (12.5%) + Additional Tax (17.5%) = 30%
The aggregate tax payable by promoters will be the sum of the normal capital gains tax and this additional income tax.
Tax Treatment for Non-Promoters
For shareholders who are not promoters, the taxation is comparatively straightforward. They will be taxed at normal capital gains rates without any additional tax component.
Non-Promoters (Corporates, Non-Corporates, and Non-Residents)
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STCG: 20%
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LTCG: 12.5%
These rates are exclusive of surcharge and cess.
Definition of Promoter
For the purpose of these provisions:
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In case of listed companies, “Promoter” is defined as per the SEBI (Buy-Back of Securities) Regulations, 2018.
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For unlisted companies, promoter is defined as per Section 2(69) of the Companies Act, 2013, or any person holding (directly or indirectly) more than 10% shareholding.
Illustrative Example
To understand the impact, consider the following scenario:
A company announces a buy-back at ₹1,000 per share. A shareholder had originally purchased the shares at ₹600 per share.
Capital Gain per Share = ₹1,000 – ₹600 = ₹400
Case 1: Non-Promoter Individual (LTCG)
Assuming the shares qualify as long-term:
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Tax = 12.5% of ₹400 = ₹50 per share
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Effective post-tax gain = ₹350 per share (before cess and surcharge)
Case 2: Promoter (Individual, LTCG)
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Normal LTCG Tax = 12.5% of ₹400 = ₹50
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Additional Tax = 17.5% of ₹400 = ₹70
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Total Tax = ₹120 per share (30%)
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Post-tax gain = ₹280 per share (before cess and surcharge)
Case 3: Promoter (Domestic Company, LTCG)
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Normal LTCG Tax = ₹50
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Additional Tax = ₹38 (9.5%)
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Total Tax = ₹88 per share (22%)
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Post-tax gain = ₹312 per share (before cess and surcharge)
This demonstrates how promoters face a significantly higher effective tax rate compared to non-promoters.
Impact on Buy-Back Activity
Under the earlier regime, buy-back consideration was taxed as dividend income at applicable slab rates. For example:
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Corporates under the new regime faced an effective tax rate of around 25.17%.
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Individuals in the highest slab faced up to 35.88% (including surcharge and cess).
The shift to capital gains taxation at 20% (STCG) or 12.5% (LTCG) for non-promoters significantly reduces the tax burden. As a result, buy-backs may once again become an attractive mode of capital distribution.
Over the past year, participation in buy-back programmes had reportedly slowed due to higher dividend-based taxation. With the proposed rationalisation, market experts expect renewed interest from public shareholders, particularly retail and institutional investors.
Policy Objective: Balancing Relief and Anti-Arbitrage Measures
The Finance Bill 2026 attempts to strike a balance:
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Relief to non-promoter shareholders through lower capital gains tax rates.
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Anti-arbitrage safeguards for promoters through additional income tax provisions.
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Simplification and clarity by excluding buy-back consideration from the definition of dividend.
By shifting the tax burden clearly to shareholders under capital gains provisions and creating differentiated treatment for promoters, the government aims to restore neutrality in corporate capital restructuring while preventing misuse.
If enacted, the proposal will mark a major structural reform in the taxation of buy-back transactions and could significantly influence corporate payout strategies in the coming financial year.