Revenue Secretary Arvind Shrivastava on February 1 sought to dispel concerns around the Budget 2026 proposal on taxation of share buybacks, asserting that the move represents a relief for most shareholders and a correction of an earlier anomaly, rather than the introduction of an additional tax.
Explaining the intent behind the proposal, the Revenue Secretary said the buyback taxation framework has been reworked to benefit non-promoter shareholders, while keeping the tax burden on promoters broadly unchanged. “I would like to clarify that it is in fact a relief, it is not an additional tax,” he said, noting that the earlier change had shifted buyback proceeds to dividend income, taxed at applicable income tax rates in the hands of shareholders.
“That is now corrected. We have put the tax at the hands of the shareholder as a capital gains tax, which long term will be only 12.5 percent. That is a correction and relief given to shareholders,” Shrivastava said.
What has changed
Under the revised framework announced in the Budget, buyback proceeds will be taxed as capital gains rather than dividend income.
Shrivastava said the change addresses the unintended consequences of an earlier redesign of the buyback tax regime, which was aimed at curbing misuse by promoters. “The whole objective at that time was misuse of tax arbitrage by promoters,” he said. In this context, tax arbitrage refers to promoters choosing buybacks over dividends primarily to reduce their tax liability, even though both are mechanisms to return surplus cash to shareholders.
He said the revised structure ensures that the tax burden on promoters remains broadly unchanged. “As far as promoters are concerned, it is status quo,” the official said. “Today the marginal rate at which they would have been paying the tax as a dividend was at their respective income tax rates. We have kept it at 30 percent for individuals and 22 percent for corporates.”
Policy intent
The finance ministry has said the additional levy on promoters is intended to neutralise the tax advantage that buybacks offered over dividends, while allowing ordinary shareholders to benefit from capital gains taxation.
“As far as other shareholders are concerned, it is a very big relief,” Shrivastava said. “The decision on buyback tax is a relief. We have corrected it by changing it to capital gains. So we have provided relief to investors.”
Tax experts say the move improves clarity and fairness in the buyback taxation regime. “Earlier, share buybacks were taxed mainly at the company level, with shareholders facing uneven or unclear outcomes. After the 2024 change, buyback proceeds are taxed in the hands of shareholders, often at applicable slab rates, on the entire receipt without allowing deduction for the cost of acquisition,” Amit Maheshwari, tax expert, told Moneycontrol.
“In the interest of minority shareholders, the Finance Minister has now proposed to tax buyback proceeds as capital gains for all shareholders, ensuring that tax applies only to the real gain,” he said. “To curb misuse through tax arbitrage, an additional buyback tax has been introduced for promoters, resulting in an effective tax rate of about 22 percent for corporate promoters and 30 percent for other promoters. This aligns buybacks with normal share sales for minority and retail investors while safeguarding revenue.”
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