The landscape for share buybacks in India is shifting once again. Following the October 2024 move to tax buybacks as dividends, the Finance Bill 2026 proposes a return to the capital gains tax framework effective1 April 2026. This “reset” aims to simplify the tax experience for retail investors while maintaining a higher tax rate for promoters.

A Tale of Two Tax Rates: Promoters vs. Non-Promoters

For a non-promoter resident individual holding listed shares for over 12 months, the effective tax rate could drop from 35.88% (under the dividend regime) to approximately 14.95%.

However, this relief does not extend to promoters. To prevent buybacks from being used as a low-tax substitute for dividends, the law proposes a 30% tax rate for individual promoters and applicable tax rates (22% to 30%) for promoter-held domestic companies based on the tax regime being followed by such companies.

Strategic Implications of the proposed amendment

The shift introduces several technical nuances that require early planning:

• Unlisted Shares: For short-term holdings in unlisted companies, the surcharge for individual promoters can reach up to 25% (new regime) and 37% (old regime). This could make the new capital gains route more expensive than the current dividend regime where surcharge is restricted to 15%.
• The 80M Leakage: Promoter holding companies may face a “double whammy.” Unlike dividends, buyback proceeds do not qualify for the Section 80M deduction, which normally prevents double taxation when a company passes profits to its shareholders. Thus, a Promoter holding company may be required to pay tax of 22% plus surcharge and cess on buyback proceeds and when it further distributes dividend to its individual shareholders – they may be again required to pay tax of 30% plus surcharge and cess.
• Global Impact: Foreign investors must re-evaluate tax treaties. While jurisdictions like Mauritius or Singapore may offer beneficial capital gains tax treatment in some cases, investors in the USA or UK might see an increased Indian tax cost.
• Stock options: A position of treating stock option buybacks as capital gains taxed at 12.5% (rather than salary / dividend taxed at 30%) exists, although this position is not free from litigation. Once the amendments are made effective, buyback involving promoter-held options (rare but seen in startups) could see an effective 30% tax outcome – removing the arbitrage between taxing buyback of stock options as capital gains instead of salary or dividend income. However, the arbitrage continues for non-promoter employees or directors.

Optimisation opportunity after the amendment becomes effective

Since buyback are now proposed to be taxed as capital gains, familiar planning levers will become relevant again and these would be available for promoters and non-promoters both:

• Cost of acquisition can be reduced from buyback proceeds, taxing only the net gain (rather than taxing the entire proceeds as “dividend”).
• Claiming capital loss set-offs can be explored.
• Individuals and HUF shareholders can explore claiming investments linked deductions (residential property) against capital gains (subject to conditions).

Technical ambiguity

Historically, when buybacks were taxed as capital gains or taxed via company-level buyback tax, the law contained an explicit exclusion in the ‘dividend’ definition to prevent buybacks from being simultaneously characterised as dividends.

That exclusion was removed in October 2024 when buybacks were made taxable as dividend. This exclusion has not been reinstated in the Finance Bill 2026. This could reopen an interpretational risk buyback being taxed as capital gains as well as dividend.

Preparing for April 2026

As we approach the 1 April 2026 deadline, the timing of a buyback becomes a critical decision. Companies must perform an early mapping of shareholder profiles, holding periods, and treaty positions to navigate this complex transition.