Finance Minister Nirmala Sitharaman used her Budget speech to rewrite how India taxes share buybacks, proposing a capital gains regime for all shareholders and a new promoter‑level levy to end tax arbitrage.
The move aims to protect minority investors and stop companies from routing payouts through buybacks instead of dividends.
The Budget proposes that all buybacks will now be taxed as capital gains, replacing the dividend‑like treatment introduced in 2024. To further disincentivise promoters from using buybacks to reduce tax liability, Sitharaman announced an additional buyback tax on promoters. The change will push the effective tax burden to 22 percent for corporate promoters and 30 percent for non‑corporate promoters. The government believes this will reduce distortions and ensure more uniform treatment of shareholder payouts.
The buyback overhaul builds on the rules notified from October 1, 2024, which had shifted the tax liability from companies to shareholders. Under those rules, the entire buyback amount was treated as dividend income in the hands of shareholders and taxed at slab rates. Companies were responsible for withholding 10 percent TDS for resident investors on payouts above Rs 5,000, and 20 percent TDS for non‑residents, subject to tax treaties.
"The Buyback tax scheme seeks to draw a distinction between promoter and non-promoter shareholders. Capital gains tax treatment seems to be restored for non-promoter shareholders. However, promoter individuals will suffer higher tax of 30 percent and promoter companies 22 percent," said Gouri Puri, Partner, Shardul Amarchand Mangaldas and Co.
A key provision that remains is the treatment of share acquisition cost. The cost of shares tendered in a buyback will continue to be treated as a capital loss, either short term or long term, depending on the holding period. Investors can set off these losses against other capital gains or carry them forward for up to eight years, providing some relief in the new system.
The Finance Minister said the revised structure will close loopholes that encouraged listed companies to prefer buybacks over dividends. For small shareholders, the shift to capital gains is expected to give clearer tax outcomes and reduce disputes over classification. For promoters, the additional levy aims to correct what the government views as an uneven tax advantage created by the old rules.
Here's how the new Budget rules would work
1) Small or minority shareholder
Say you are a retail investor in ABC Ltd.
- You bought 100 shares at Rs 700 each (cost = Rs 70,000).
- ABC announces a buyback at Rs 1,000 per share.
- You tender all 100 shares and receive Rs 1,00,000.
Under the new rules:
Your gain = Rs 1,00,000 minus Rs 70,000 = Rs 30,000
This Rs 30,000 is taxed as capital gains (short‑term or long‑term).
No special buyback tax applies to you.
If you bought at Rs 1,100 and tendered at Rs 1,000:
- Proceeds = Rs 1,00,000
- Cost = Rs 1,10,000
- Loss = Rs 10,000, which becomes a capital loss you can set off or carry forward.
2) Promoter shareholder (where the extra levy hits)
Now consider the promoter of ABC Ltd.
- The promoter tenders shares and makes a capital gain of Rs 5 crore.
Under the new Budget:
- First, the Rs 5 crore is taxed as capital gains.
- Then an extra buyback tax applies because they are a promoter.
- Corporate promoter: effective tax roughly 22 percent
- Non‑corporate promoter: effective tax roughly 30 percent
What the Budget does
- Puts all shareholders into a clean capital gains system
- Adds a higher promoter‑level levy so buybacks no longer offer low‑tax arbitrage versus dividends
