The Budget 2026 has introduced significant changes to taxation on share buybacks. These changes affect both retail investors and promoters.
Now, retail investors will be taxed on buyback earnings as capital gains, rather than as dividend income.
For corporate promoters, the tax rate has been fixed at 22%, while non-corporate promoters will face a tax rate of 30%. Let’s break down these changes and their implications.
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Current Rules for Retail Investors
Under the existing system, earnings from share buybacks were treated as dividend income. This means:
The buyback proceeds were added to the investor’s total income.
Taxes were levied according to the investor’s income tax slab.
For those in higher income brackets, taxes could go up to 30%.
Essentially, retail investors could end up paying a higher tax on buyback earnings if they were in a top tax bracket.
Changed Rules for Retail Investors
Budget 2026 has reclassified buyback income for retail investors as capital gains, which brings a new tax structure:
Short-Term Capital Gains (STCG): Taxed at 20% if shares are held for less than 12 months.
Long-Term Capital Gains (LTCG): Taxed at 12.5% if shares are held for more than 12 months.
Exemption: LTCG up to ₹1.25 lakh per year is tax-free.
This change reduces the tax burden for retail investors in higher income brackets, making buybacks more attractive. For many investors, the LTCG exemption could prove to be a major financial advantage.
Tax Rules for Promoters
Promoters will face a different tax structure:
For domestic companies, capital gains tax on buyback income is 22%.
For non-domestic companies, the tax rate is 30%.
This distinction ensures that promoters are taxed differently from retail investors, reflecting their larger role in company ownership.
According to Karthick Jonagadla, CEO of Smallcase Quantace Research, these changes could also influence company strategies: companies may now focus more on dividends rather than buybacks, as dividend payouts can offer more flexibility under the new tax framework.
What is a Buyback?
A buyback is when a company repurchases its own shares from shareholders. It is one of the ways a company can reward its investors, alongside dividends.
The tax on buybacks is calculated based on the difference between the repurchase price and the original issue price of the shares.
Why Companies Conduct Buybacks
Companies usually execute buybacks when they have excess cash and do not require immediate investments. The key reasons for buybacks include:
Increasing Earnings Per Share (EPS): Reducing the number of outstanding shares boosts EPS, which can strengthen the stock’s market value.
Confidence Signal: Buybacks show that the company believes its shares are undervalued and is confident in its financial health.
Efficient Cash Use: Instead of holding idle cash, companies return value to shareholders through buybacks.
Overall, buybacks serve both as a financial strategy for companies and a potential benefit for investors under the revised taxation rules.