The Income Tax Department has issued a clarification on how the “buyback tax” has changed with the Union Budget 2026 for the benefit of small shareholders.
“Overall, buyback taxation has been simplified with a benefit to small shareholders,” Taxman The tax liability for promoters will remain largely the same.
Buyback tax for shareholders
Currently buybacks were taxed as dividends but redemptions of shares were treated as capital losses. This created problems for small shareholders who had no capital gains to offset losses. Furthermore, buybacks are conceptually in the nature of capital gains.
Therefore, in the Finance Bill 2026, the buyback treatment has been changed to capital gains.
Shareholders other than promoters will pay tax on such gains at the applicable capital gains tax rate. For long-term capital gains, listed and unlisted, it is 12.5%. The rate applicable on short term listed is 20%, and on short term unlisted.
Buyback tax for promoters
However, to prevent promoters from misusing the buyback, they will have to pay additional income tax. Where the domestic company is a promoter, it will have to pay an effective tax of 22% on the profit on buyback.
Where the promoter is other than a domestic company, they will have to pay an effective tax of 30% on the profits on buyback.
For promoters, the tax liability will remain largely the same if dividends are taxed in their hands.