The government has introduced a flat 12% surcharge on buyback-related capital gains for all shareholders. According to experts, the new flat surcharge, introduced as an amendment to the Finance Bill 2026, could increase the overall tax outgo for smaller corporate shareholders and middle-income individual taxpayers, while giving relief to the super-rich.
Another amendment to Section 140 of the Income-Tax Act, 2025 carried through the Bill will raise the turnover limit for start-up tax holiday from Rs 100 crore to Rs 300 crore. This aligns with the new start-uppolicy notified by the Department for Promotion of Industry and Internal Trade (DPIIT) in February. The move will ensure that fast-growing innovation-driven start-ups won’t lose the tax benefits as they scale up.
Buyback Squeeze
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Global Advisors, said: “Moving to a flat 12% surcharge means a higher tax outgo across many brackets, making buybacks a costlier route for cash extraction compared to alternatives such as dividends.” This could likely discourage individual shareholders from initiating buybacks and distort capital allocation decisions.”
Currently, a graded surcharge structure applies to buybacks by individuals: no surcharge on gains up to Rs 50 lakh, 10% levy on gains between Rs 50 lakh to Rs 1 crore, and 15% for gains exceeding Rs 1 crore. For corporate shareholders, no surcharge is currently levied on buyback capital gains up to Rs 1 crore, and a 7% levy applies to such gains between Rs 1 crore and Rs 10 crore. Corporate shareholders with higher buyback gains must pay a 12% surcharge.
The surcharges apply as a percentage of the capital gains tax.
The Bill was passed by the Lok Sabha on Wednesday. Amit Maheshwari, Managing Partner at AKM Global, said the Finance Bill 2026 shifts buyback taxation to the shareholder level, but theapplicable surcharge was initially unclear, especially for promotersand high-income taxpayers.
Jhunjhunwala noted that the change would have a mixed impact depending on the size of the buyback and shareholder category. “The impact of thisamendment, however, would largely be limited to small and mid-sizedbuybacks, as large buybacks where gains exceed Rs 1 crore are alreadysubject to a higher surcharge rate of 15% and hence the amendmentactually implies a 3% reduction in surcharge for such category,” hesaid.
For corporate shareholders, the flat 12% surcharge could raise costs in certain income slabs. “For corporate shareholders, the flat 12% surcharge on buyback may have an impact in situations where gains are up to Rs 1 crore, where no surcharge currently applied and where taxable income falls between Rs 1 crore and Rs 10 crore, where a 7% surcharge is applied.
In both scenarios, the shift to a uniform 12% surcharge increases the overall tax burden, thereby making buybacks relatively more expensive,” Jhunjhunwala added.
Scaling Innovation
The DPIIT revised the tax holiday eligibility thresholds for the country’s inovation-driven ecosystem by raising the turnover levelsto Rs 200 crore from Rs 100 crore for regular start-ups and to Rs 300 crore for deep tech ventures. The Finance Bill implements the tax proposals announced in the Union Budget for FY27. It will now move to the Rajya Sabha for consideration before receiving presidential assent.
Please click here to view the full story on Financial Express