On February 1, Finance Minister Nirmala Sitharaman unveiled the Union Budget 2026. She declared that repurchase proceeds for all shareholders would be considered capital gains during her budget speech. How does it affect your taxes and what does it mean for you?
How buyback taxation worked earlier
In the past, buybacks were subject to corporate taxation. The buyback funds were tax-free in the hands of the shareholder, and the corporation paid a buyback tax of about 20%. Because of this, it was frequently more appealing to tender shares in a repurchase than to sell them on the open market, where capital gains tax would be due.
Change introduced in 2024
But on October 1, 2024, the Finance Act (No. 2), 2024, went into force, changing this. The new provisions transferred buyback proceeds to the shareholder and treated them as dividend income for tax purposes, with no deduction for acquisition costs.
Capital loss treatment under 2024 rule
Depending on the holding time, the cost of the company’s repurchased shares is either considered a short-term or long-term capital loss. According to the provisions for set-off and carry-forward of losses under income tax legislation, this loss may be deducted from taxable capital gains.
For many, that was a double whammy because they were no longer tax-free and frequently had to pay more tax than they would have on capital gains.
What Budget 2026 changes
However, there are certain significant changes that investors should be aware of when Budget 2026 reinstates the capital gains classification. All repurchase proceeds would be taxed as capital gains for shareholders rather than dividend income under the new approach put forth by Finance Minister Nirmala Sitharaman. This will align buybacks with the taxation of earnings from normal share sales. This eliminates the quirk where buybacks could draw slab rates without permitting the deduction of the acquisition cost.
“Instead of being considered as dividend income, it is proposed to provide that consideration paid by a shareholder on buy-back shall be subject to tax under the head “Capital Gains,” FM said in the budget address.Retail investors will pay less in taxes as a result of the proposed adjustment, particularly those who were in the 30 percent tax bracket, according to Gopal Bohra, Partner-Tax at N.A. Shah Associates.
📊 Buyback Tax Budget 2026 – Key Impact
- Tax Head: Capital Gains (instead of dividend income)
- Cost Deduction: Allowed
- LTCG Rate: 12.5%
- STCG Rate: 20%
- Main Beneficiaries: Retail & non-promoter investors
Example explaining tax impact
For example, a shareholder paid Rs 10 for 100 shares and then offered them for sale at Rs 15 each. According to current law, a shareholder is entitled to a capital loss of Rs 500, which may be deducted from another capital gain, and must pay dividend tax on Rs 1500 at the applicable tax rate.
In contrast to the proposed amendment, shareholders of listed securities added by Bohra will only be required to pay capital gain tax on Rs 500 at a rate of 12.5% for LTCG and 20% for STCG.
Why small investors benefit most
Small stockholders stand to gain the most. In the past, a large number of individual investors were unable to properly utilize the capital loss resulting from buybacks due to a lack of capital gains. The new method makes the procedure easier and more equitable by guaranteeing that only genuine gains are subject to taxation.
Loss of Section 87A rebate
However, under the current regime, tax efficiency decreases. “This change, which does not qualify for the 87A rebate, has been reinstated to attract capital gain tax. Therefore, there is more tax to pay now than there was in the past,” stated Himank Singla, SBHS & Associates’ founding partner.
Under the new tax regime, residents with total incomes up to Rs 12 lakh are eligible for a refund of up to Rs 75,000 under Section 87A. It excludes income, including capital gains, that is subject to a particular tax rate.
💰 Who Pays More or Less Tax?
- Retail Investors: Mostly lower tax outgo
- High Slab Investors: Big relief vs 2024 rule
- Income ≤ ₹12 lakh: May lose 87A rebate
- Promoters: Higher differential tax applies
Promoter-specific tax changes
This is mostly advantageous for non-promoter and individual investors. Long-term gains are taxed at 12.5% and short-term gains at 20% (with surcharge and cess) since they are considered capital gains. These tax rates are generally lower than the slab rates under “income from other sources.” Compared to the post-2024 regime, which taxed the full receipt at slab rates, this should lower the tax outlay on buyback proceeds.
However, not every stakeholder reaps the same rewards. In order to prevent potential abuse of buybacks as a weapon for tax arbitrage, Budget 2026 establishes a differential levy for promoters. Additionally, a differential rate for promoters is proposed, with the effective rate on repurchase gains being 22 percent for domestic firms and 30 percent for non-domestic companies.
Does this imply higher taxes for individual investors? Your function as a shareholder and your tax bracket will determine this. Due to the 2024 change, which taxed the whole buyback proceeds at slab rates, certain high-income investors effectively paid more.
For regular investors, switching back to the capital gains basis usually reduces the tax impact of buybacks, particularly if you are eligible for long-term capital gains rates.
Frequently asked questions
1. After Budget 2026, what is the largest modification to buyback taxation?
Budget 2026 allows shareholders to deduct acquisition costs and only pay taxes on actual earnings by taxing repurchase proceeds as capital gains rather than dividend income.
2. What distinguishes this from the 2024 regulation?
Budget 2026 taxes only the net profit as capital gains, but the 2024 regulation taxed the entire buyback amount at slab rates as dividend income with no cost deduction.
3. How much tax will individual investors now pay?
Because capital gains rates (12.5% LTCG and 20% STCG) are often lower than income-tax slab rates, the majority of retail investors will pay less tax.
4. Why do certain investors continue to pay higher taxes?
Small taxpayers with income up to ₹12 lakh may lose this benefit because capital gains are not eligible for the Section 87A rebate.
5. After Budget 2026, would promoters be subject to separate taxes?
Indeed, in order to avoid tax arbitrage, promoters are subject to higher effective tax rates, which are roughly 22% for domestic promoters and 30% for non-domestic promoters.
Conclusion
Although some small taxpayers may notice a little greater tax outgo because of the loss of the rebate, Budget 2026 makes buyback taxes equitable for the majority of retail investors by taxing only real profits.
Disclaimer:
This article is for informational purposes only and should not be considered as tax, legal, or investment advice. Tax laws are subject to change and may vary based on individual circumstances. Readers are advised to consult a qualified tax professional or financial advisor before making any investment or tax-related decisions.
