The Union Budget 2026 proposes to revamp the tax framework for share buybacks in India, aimed at balancing tax outcomes for minority shareholders and promoters. Buybacks have historically been used as a tool for companies to distribute surplus cash, often preferred over dividends for their perceived tax efficiency. Recent amendments, however, have eroded these advantages by altering their tax treatment. Against this backdrop, the Budget proposes to introduce a capital gains treatment for buybacks, while also introducing targeted guardrails to curb potential tax arbitrage by promoters.

The pre-2026 regime

Historically, when domestic companies undertook share buybacks, they were subject to a 20% base tax on the net distributable income, with shareholders receiving buyback proceeds tax-free. This regime was replaced in October 2024, when buyback proceeds in the hands of shareholders were classified as “dividends” and the entire buyback consideration was taxed in the hands of the shareholders at their applicable slab rates. The cost-acquisition benefit of shares was allowed as a ‘capital loss’ to the shareholder, which could be offset against other capital gains the shareholder earns. Resultantly, even where the buyback proceeds were modest, tax was levied on the gross receipts, as high up to 30% (plus surcharge and cess).

Capital gains treatment going forward for retail/minority shareholders

Now, the Budget pronounces yet another shift in buyback taxation. Buyback proceeds are proposed to be taxed as capital gains in the hands of shareholders. Under the new framework, shareholders will be taxed only on the difference between the buyback price and the cost of acquisition of shares, aligning its taxation with the sale of shares. For most retail and minority investors of listed equity shares, this change is materially beneficial since long-term shareholders can avail the applicable long-term capital gains base tax rate of 12.5%, while short-term holders will be taxed at a base rate of 20% (as compared to their slab rates up to a base tax rate of 30%). The amendment is expected to aid listed companies undertaking buybacks since it allows shareholders to benefit from lower taxation arising from the deduction of their cost of acquisition, as well as a reduction in tax rates based on their period of holding.

Differential taxation for promoters

In a bid to deter promoters from using share buybacks as a tax-efficient mechanism for extracting value, the revised framework introduces an additional capital gains tax levy for promoter shareholders (akin to tax on dividend income), resulting in a higher capital gains tax levy. Promoter shareholders, being domestic corporate entities, are proposed to be taxed at an effective base tax rate of 22% on buyback proceeds, while non-corporate promoters are set to face an effective base tax rate of 30% (increased by applicable surcharge and cess).

This promoter-specific tax burden is designed to neutralise arbitrage opportunities that could have made share buybacks more attractive than dividends, purely on tax considerations, thereby reinforcing corporate governance. The underlying policy objective is unambiguous: buybacks should not operate as a conduit for promoters to obtain preferential tax treatment relative to other shareholders or alternative distribution mechanisms.

What changes for non-residents

The shift to capital gains taxation meaningfully reshapes outcomes for non-resident investors in a more nuanced way. Under the earlier dividend-based taxation approach, many non-residents benefited from reduced withholding rates under Indian tax treaties, even though tax applied to the gross buyback amount. With buybacks now characterised as capital gains, treaty outcomes would depend on the manner in which taxation of capital gains is governed under the tax treaty. For instance, investors from Mauritius and Singapore, who have acquired shares prior to April 1, 2017, enjoy grandfathered protection, with gains on buyback potentially exempt in India. However, before leveraging the treaty benefit, non-resident investors ought to undertake a detailed analysis in light of applicability of the anti-abuse tests, namely the general anti-avoidance rules (i.e., GAAR) in India, as evidenced in the recent ruling of the Supreme Court in the case of Tiger Global International II Holdings and also the anti-avoidance rules contained in the respective treaties (as seen in the India-Singapore tax treaty).

For other non-resident investors, the change is more nuanced. While dividend taxation often came with a concessional tax treaty rate, most of India’s treaties do not provide a reduced rate for capital gains. This, consequently, results in buyback gains being now taxed at domestic capital gains rates discussed above.

The amendment underscores a broader shift in India’s tax policy, towards a framework that balances fairness in taxation of capital distribution and keeping tax arbitrage opportunities in check. The amendment will benefit retail and minority investors, aligning buyback taxation with capital gains tax rates.

In the case of corporate shareholders, the erstwhile tax framework permitted a deduction in respect of inter-corporate dividends, provided the buyback proceeds received by such corporate shareholders were further distributed to the ultimate individual shareholders at least a month before the due date for filing the return of income. This mechanism effectively ensured avoiding multiple layers of taxation on the same stream of income. Under the revised framework, the buyback consideration is first subjected to tax as ‘capital gains’ in the hands of the corporate shareholders and thereafter, when the post-tax proceeds are distributed onwards, the same amount is again subjected to tax as dividend income in the hands of the ultimate individual shareholders. As a result, a level of economic double taxation of buyback proceeds would arise, with no corresponding relief or pass-through mechanism to mitigate the tax burden.

For non-resident investors, the implications are inherently treaty-specific, requiring a careful assessment of applicable tax treaties to determine whether the shift from dividend to capital gains taxation results in continued protection, grandfathering benefits or exposure to domestic tax rates. Holistically, the amendment reflects a conscious move from a standard tax incidence across the category of taxpayers towards a nuanced regime that aligns substance and taxation while preserving India’s attractiveness as an investment destination.

(Ajinkya is partner and Doshi is principal associate at Khaitan & Co. Views are personal.)