‘This is a relief, not an additional tax’: Revenue Secretary Arvind Shrivastava explains rationale behind buyback tax

Finance Minister Nirmala Sitharaman, in her Union Budget 2026 speech, announced a major overhaul of the taxation framework for share buybacks, proposing that buyback proceeds for all categories of shareholders will once again be taxed as capital gains. The move aims to curb tax arbitrage while providing relief to minority shareholders.

Under the revised framework, long-term shares tendered in a buyback will attract long-term capital gains (LTCG) tax at 12.5%, replacing the earlier system that treated buyback proceeds as deemed dividends taxable at the shareholder’s applicable income-tax slab rate.

The Finance Minister, however, made it clear that promoters will be subject to an additional buyback tax to disincentivise the use of buybacks as a tax-arbitrage tool. As a result, the effective tax rate for corporate promoters will be 22%, while non-corporate promoters will face an effective tax rate of 30%.

Rational behind buyback tax

Clarifying the intent behind the policy shift, Arvind Shrivastava, Secretary, Department of Revenue, said the changes announced by FM Sitharaman are intended as a relief for shareholders, not an additional tax burden.

Speaking after the Budget presentation, Shrivastava said the government has corrected the buyback tax framework by restoring capital gains taxation for shareholders, reversing the earlier regime under which buyback proceeds were treated as dividend income and taxed at applicable slab rates.

“This is a relief, not an additional tax,” Shrivastava said. “The buyback tax system had been changed earlier to treat buyback income as dividend income, taxable at the shareholder’s applicable income-tax rate. That has now been corrected, and the tax has been put back in the hands of shareholders as capital gains.”

Under the revised framework announced in Budget 2026–27, long-term shares tendered in a buyback will attract LTCG tax of 12.5%, significantly lower than the slab-based taxation that applied earlier. The move is expected to provide substantial relief to minority and non-promoter shareholders.

Shrivastava explained that the earlier shift to dividend taxation was introduced to curb misuse of tax arbitrage by promoters, who were using buybacks as a more tax-efficient way to extract profits. “The objective at that time was to prevent misuse of tax arbitrage by promoters,” he said.

The announcement marks a reversal of the rule introduced from October 1, 2024, under which all amounts received by shareholders from a buyback were classified as dividend income and taxed accordingly. That change had drawn criticism for penalising minority shareholders and distorting capital-allocation decisions.

Experts view on buyback tax

“In a big relief to minority shareholders, buybacks will once again be taxed as capital gains. This means long-term shares tendered in a buyback will now be taxed at 12.5%, instead of the normal slab rate,” said Kunal Savani, Partner at Cyril Amarchand Mangaldas.

Navneet Munot, MD and CEO of HDFC Asset Management Company, said the revised framework would enable companies to return surplus capital more efficiently, aligning buyback decisions with long-term shareholder value rather than tax considerations.

Aditya Agrawal, CFA, Chief Investment Officer, Avisa Wealth Creators, said the hike in Securities Transaction Tax (STT) on derivatives could weigh on trading volumes and near-term market sentiment amid heightened volatility. However, this is partly offset by the rationalisation of buyback taxation, with proceeds now taxed as capital gains in shareholders’ hands.

“The change improves transparency and capital-allocation efficiency, making the Budget incrementally positive for long-term equity investors, even though near-term triggers remain limited.”

Overall, the buyback tax overhaul is seen as striking a balance between preventing promoter-led tax arbitrage and restoring fairness for minority shareholders, while reinforcing capital-gains taxation as the preferred route for equity income.