The Union Budget 2026-27 has introduced a significant overhaul of the "share buyback taxation" framework in India. This change marks a decisive shift from the "deemed dividend" model back to a "capital gains" regime, providing substantial relief to retail investors while tightening the screws on promoters to curb tax arbitrage. The 2026 buyback tax reform restores fairness to the capital markets, making share repurchases a more attractive and transparent way for companies to return value to their small shareholders.
In a major win for minority shareholders, the Indian Union Budget 2026-27 proposes that proceeds from share buybacks will no longer be treated as dividend income. Instead, they will be classified as "Capital Gains".
Previous Rule (Post-Oct 2024):The entire buyback amount was taxed at the shareholder’s slab rate (up to 30%+) as "deemed dividend," leading to heavy tax outgoes on the principal amount itself.
New Rule (Effective April 2026):Tax is levied only on the "actual profit" (Buyback Price minus Acquisition Cost). This aligns buyback taxation with the rules for selling shares on a stock exchange.
For non-promoter shareholders, the tax burden is expected to drop significantly. The applicable rates are now tied to the holding period:
Long-Term Capital Gains (LTCG):Taxed at "12.5%" (for shares held for more than 12 months). Investors also benefit from the annual exemption limit of "₹1.25 lakh" on total equity LTCG.
Short-Term Capital Gains (STCG):Taxed at "20%" (for shares held for less than 12 months).
To prevent companies from using buybacks as a tax-free alternative to dividends for their founders, the budget introduced a "differential tax rate for promoters" (defined as those holding >10% stake):
Corporate Promoters: Effective tax rate of "22%".
Non-Corporate Promoters: Effective tax rate of "30%".
This "Promoter-Level Tax" ensures that those in control of corporate decision-making do not gain an unfair tax advantage over ordinary investors.
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