4 min readMumbaiUpdated: Feb 1, 2026 09:32 PM IST
In a move that would benefit individual investors, Finance Minister Nirmala Sitharaman in her Budget 2026-27 speech Sunday proposed changing the taxation of proceeds from buyback of shares to capital gains.
“In the interest of minority shareholders, I propose to tax buyback for all types of shareholders as capital gains,” Sitharaman said in her speech. Currently, buyback proceeds are being treated as dividend income in the hands of the seller.
However, to disincentive the potential misuse of tax arbitrage, promoters will pay an additional buyback tax. This will make effective tax 22 per cent for corporate promoters. For non-corporate promoters the effective tax will be 30 per cent, the Finance Minister said.
Buyback of shares refers to a company’s repurchase of its own shares from existing shareholders. The process reduces the number of outstanding shares in the open market over a period which can lead to better valuation and earning per share (EPS).
When a company repurchases its shares, the amount paid to shareholders generally includes two parts — return of the money originally invested, and any extra amount (profit or premium) earned on that investment.
Over the years, tax laws have changed multiple times on how these buyback proceeds are taxed — from being treated as dividend income, to capital gains.
From October 2024, the law treated the entire buyback amount paid by a company as dividend income in the hands of the shareholder. As a result, even the shareholder’s original investment was taxed as income, which created an unintended and unfair outcome.
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However, with the proposal announced in the Budget 2026-27, amount received on share repurchase will once again be treated as capital gain. This means that the original investment (cost of shares) will not be taxed, and only the actual gain will be subject to tax, similar to a sale of shares.
“The Finance Bill, 2026 proposes to restore the taxation of share buybacks into the capital gains framework by correcting an unintended anomaly introduced in October 2024, where even the original investment on shares was taxed as income. This change brings much-needed fairness and once again positions buybacks as a legitimate mechanism for return of capital,” said Manvinder Singh, Partner, JSA Advocates & Solicitors.
With this correction, share buybacks will once again become a viable and tax-efficient method for companies to return capital to shareholders, alongside dividends, he added.
According to Riaz Thingna, Partner, Grant Thornton Bharat, the proposed amendment for taxation of buyback of shares is a step in the right direction. By clarifying that the profit will be treated as capital gains, the change will benefit many minority shareholders who will now pay tax on their gains at only 12.5%.
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“The change will not benefit ‘rich’ promoters who will continue to pay tax at 22% or 30% as the case may be. However, this will help in providing certainty on one hand and enable distribution of value to shareholders with lower tax cost,” he said.
Data from primedatabase.com shows that the number of buyback issues which remained steady at 48 during 2023 and 2024, declined to 14 in 2025.
Vaibhav Gupta, partner, Dhruva Advisors, a tax and regulatory advisory firm, said that amendment in buyback taxation to treat it as capital gains as earlier is positive for retail and non-promoter shareholders. However, an issue that is likely to arise and cause litigation going forward is offsetting capital losses against the buyback proceeds, especially in cases where there is other capital gains income in the same year. The tax officer is likely to disallow the loss offset against buyback income as it would reduce the additional income tax payable by promoters, he said.
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