Clauses 27 and 34 of the Finance Bill, 2026 propose a significant rationalisation in the taxation of share buybacks under the Income-tax Act, 2025.
The current dividend-based tax framework for buybacks is proposed to be replaced with a capital gains-based regime, accompanied by differential tax treatment for promoters.
The amendments are proposed to take effect from 1 April 2026, i.e., from tax year 2026-27 onwards.
Existing Tax Treatment of Share Buybacks
Under the current provisions of the Income-tax Act, 2025:
- Consideration received by a shareholder on buyback of shares is treated as dividend income under section 2(40)(f)
- The cost of acquisition of the shares extinguished on buyback is recognised separately as a capital loss under section 69
Issues with the existing regime
- Artificial bifurcation of a single transaction
- Capital loss may not always be immediately usable
- Potentially higher effective tax burden
What Do Clauses 27 and 34 Propose?
1. Shift from Dividend Taxation to Capital Gains
It is proposed that:
Consideration received on buyback of shares shall be chargeable to tax under the head “Capital gains”, instead of being treated as dividend income.
This change eliminates the dual treatment and aligns buyback taxation with the economic substance of the transaction.
2. Special Tax Treatment for Promoters
Clause 34 further provides that, having regard to the distinct position and influence of promoters in corporate decision-making:
- Promoters (non-corporate):
- Effective tax liability of 30%, comprising:
- Tax at applicable rates, plus
- An additional tax
- Effective tax liability of 30%, comprising:
- Promoter companies:
- Effective tax liability of 22%
This introduces a separate effective tax framework for promoters participating in buyback transactions.
Clause-wise Legislative Changes
Clause 27: Amendment to Section 2 (Definitions)
Clause 27 amends section 2 of the Income-tax Act, 2025, relating to definitions, to exclude buyback consideration from the scope of “dividend”.
This amendment is essential to enable taxation of buyback proceeds under the head “Capital gains”.
Clause 34: Capital Gains Taxation of Buybacks
Clause 34 provides for:
- Chargeability of buyback consideration under capital gains
- Recognition of gains arising from extinguishment of shares
- Imposition of higher effective tax liability for promoters, reflecting their influence in buyback decisions
Meaning of the Proposed Change
In practical terms, the proposal means:
- Buyback proceeds will be treated similar to sale consideration
- Cost of acquisition will be directly offset against buyback proceeds
- Net gains will be taxed under capital gains
- Promoters will bear a higher effective tax cost than non-promoter shareholders
Implications of the Proposed Buyback Tax Regime
1. Simplified and Coherent Tax Treatment
- One transaction → one head of income
- Eliminates fragmented tax outcomes
2. Promoter-Specific Impact
- Higher effective tax reflects:
- Control over buyback decisions
- Potential influence on timing and structure of buybacks
- May affect promoter participation strategy
3. Impact on Non-Promoter Shareholders
- Taxed under normal capital gains provisions
- Direct utilisation of cost of acquisition improves symmetry
4. Corporate Capital Allocation Decisions
- Companies may reassess:
- Buyback vs dividend decisions
- Shareholder mix implications
- Post-tax outcomes for promoters
Effective Date
✔ Applicable from 1 April 2026. Applies to tax year 2026-27 and subsequent years
Conclusion
Clauses 27 and 34 of the Finance Bill, 2026, introduce a fundamental shift in buyback taxation, from dividend income to capital gains.
While the move simplifies tax treatment for shareholders generally, the higher effective tax burden for promoters underscores a policy choice to recognise their unique role in corporate buyback decisions.
The amendment represents a rationalisation of tax structure rather than a concessional measure, with important implications for promoters, investors, and corporate treasury planning.
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