Buy-backs Proposed amendments in Budget 2026

 The Government has been revisiting taxation of share buy-backs very frequently - making, unmaking, and remaking the framework - each time introducing a new approach; the latest one being the Budget announcements yesterday which seeks to tax buy-backs through a promoter-based classification.

Prior to the Finance Act, 2013, buy-back proceeds were taxable as capital gains in the hands of shareholders; this changed in 2013 when a special regime shifted the tax incidence to the company, broadly aligned with the dividend distribution tax framework, resulting in exemption for shareholders. The position was again reversed, with buy-back proceeds again being taxed in the hands of shareholders as dividend income, accompanied by a mechanism allowing loss recognition up to the amount of the original investment. Continuing this evolution of frequent changes, the Finance Bill, 2026 now proposes to tax shareholders by categorising them as promoters and non-promoters, in accordance with applicable SEBI regulations (for listed companies ) and the Companies Act (for unlisted companies).

Proposed Tax Rates from 1 April 2026 -
⎼ Tax rate for non-promoters would be as per applicable capital gains tax rates applicable to the non-promoter shareholder tendering the shares in buy back.
⎼ Tax rate for promoters would be as under –

Category	Gains	Domestic Co.	Other than Domestic Co.
Listed shares	STCG	20% + 2% = 22%	20% + 10% = 30%
Other securities		Applicable rates
Listed / Unlisted securities	LTCG	12.50% + 9.5% = 22%	12.50% + 17.50% = 30%

It is noteworthy to mention that holding of 10% or more of shares of unlisted companies would automatically be considered as ‘promoter’ for the limited purposes of buy-back provisions and higher tax rates ought to apply in such cases. Further, the amendments tighten the overall framework and has wider implications such as -
1. Capital gains earned by Individual/HUF shareholders may be optimised by opting for investment-based deductions (subject to prescribed conditions) if the gains are long-term
2. For Foreign shareholders, DTAA provisions could lower the effective tax rate (subject to evaluation)
3. Dividend upstreaming deductions cannot be availed by Indian corporate shareholders, a benefit that multilayered corporate structures had earlier leveraged while upstreaming surplus funds
4. Taxability in the hands of shareholder as capital gains may extend applying other provisions applicable to capital gains like deemed valuation, deduction for cost etc. which would lead corporates and promoters to do a cost-benefit analysis separately.
5. Apart from the above, there are other nuances around withholding requirements while remitting consideration to shareholders, as well as compliance obligations such as filing of SFT forms.

The proposed changes to the buy-back taxation regime underscore the Government’s continued focus on tightening anti-avoidance safeguards while recalibrating the incidence of tax across different categories of shareholders. While the promoter-based approach marks a significant departure from the earlier one-size-fits-all framework, it also introduces new layers of complexity in terms of valuation, rate application, withholding, and compliance. Going forward, companies and shareholders alike will need to reassess buy-back strategies with greater care, factoring in shareholder profiles, treaty positions, and potential valuation implications, as the effectiveness of buy-backs as a capital management tool will increasingly depend on informed structuring rather than commercial intent