Buyback Under Capital Gains Tax - Meaning, Rules and Budget 2026 Updates

Q: How is the taxable amount calculated for a share buyback after April 2026?

Under the updated rules effective April 2026, taxation is applied only on the actual profit earned from the buyback transaction, not the full amount received. The taxable gain is calculated by subtracting the Cost of Acquisition from the Buyback Price. For instance, if shares were purchased at 400 and bought back at 600, the taxable capital gain is 200 per share. This change ensures fair taxation by focusing only on real gains, unlike earlier rules where the entire buyback amount was taxed.

Q: What are the specific tax rates for retail investors in a buyback?

Retail investors are taxed based on whether their gains qualify as long-term or short-term. If listed shares are held for more than 12 months, gains are treated as Long-Term Capital Gains and taxed at 12.5% on amounts exceeding 1.25 lakh annually. If held for 12 months or less, gains are classified as Short-Term Capital Gains and taxed at 20% when sold through a stock exchange. For off-market transactions, gains may be taxed according to the investor’s applicable income tax slab.

Q: Why did the government change the "deemed dividend" rule introduced in 2024?

The deemed dividend rule introduced earlier taxed the entire buyback amount as income, including the investor’s original investment. This created an unfair tax burden and often resulted in situations where investors showed losses on paper but still paid taxes. The 2026 revision was introduced to correct this issue by aligning taxation with actual economic gains. By treating buybacks as capital transactions, the new system ensures that only real profits are taxed, making the structure more logical and investor-friendly.

Q: Do promoter shareholders pay a higher tax rate than retail investors?

Yes, the revised tax framework introduces a differentiated structure for promoters. While retail investors continue to pay standard capital gains tax based on holding period, promoter shareholders are subject to higher effective tax rates. Corporate promoters may face a capped rate of around 22%, while non-corporate promoters, such as individual founders, may be taxed at around 30%. This approach helps prevent misuse of buybacks as a tax-saving alternative to dividends and ensures equitable taxation across different investor categories.

Q: Can I still claim a capital loss if my shares are bought back?

Yes, investors can claim a capital loss if the buyback price is lower than their original purchase cost. The loss is calculated as the difference between the Cost of Acquisition and the Buyback Price. This loss can be set off against other capital gains in the same financial year or carried forward for up to eight years. Unlike earlier rules where losses were artificially created, the updated framework ensures that losses are recognised only when there is an actual financial loss.

Q: How does buyback taxation compare to dividend taxation now?

After April 2026, buybacks are generally more tax-efficient for long-term investors. Dividends are taxed at the investor’s applicable income tax slab rate, which can be quite high for individuals in higher brackets. In contrast, buybacks are taxed only on the profit portion at lower capital gains rates, especially 12.5% for long-term holdings. This means investors can retain a larger portion of their returns through buybacks, making them a more attractive option compared to dividend payouts.

Q: Is there any TDS (Tax Deducted at Source) on buyback proceeds?

Under the earlier regime, companies were required to deduct TDS on buyback proceeds when treated as deemed dividends. However, from April 2026, as buybacks are taxed under capital gains, the responsibility of tax payment shifts to the investor. Investors must calculate and pay taxes through advance tax or while filing their income tax return. This change simplifies the process and gives investors more control over tax planning, although they must ensure proper compliance and timely reporting.

Q: What happens to shares held for less than 12 months (Short-Term)?

If shares are held for 12 months or less, any profit from the buyback is treated as Short-Term Capital Gains. For listed shares sold through a stock exchange, these gains are taxed at a flat rate of 20%. If the transaction does not involve a stock exchange, such as in certain unlisted cases, the gains are added to the investor’s total income and taxed according to their income tax slab. Therefore, the holding period plays a crucial role in determining the tax liability.

Q: Does the 1.25 lakh exemption for LTCG apply to buybacks?

Yes, the exemption threshold for Long-Term Capital Gains also applies to buyback transactions involving listed equity shares. Investors can claim exemption on the first 1.25 lakh of total long-term capital gains in a financial year. This includes gains from shares, equity mutual funds, and buybacks combined. Tax at 12.5% is applicable only on gains exceeding this limit. This provision helps reduce the tax burden for small and moderate investors participating in buyback transactions.

Q: How should I report buyback gains in my Income Tax Return (ITR)?

From the financial year 2026-27 onwards, buyback gains must be reported under the Capital Gains section of the Income Tax Return. Investors need to provide details such as purchase date, acquisition cost, buyback date, and sale consideration. Most salaried individuals with such gains typically use ITR-2 for filing. It is important to maintain proper documentation, such as contract notes or buyback statements, to ensure accurate reporting and avoid discrepancies during tax assessment.

From April 1, 2026, share buyback proceeds are taxed as capital gains for shareholders rather than dividends, with tax applied to the gain (buyback price minus acquisition cost). Shares held over 12 months incur 12.5% Long-Term Capital Gains (LTCG) tax, while those held less than 12 months face Short-Term Capital Gains (STCG) tax, making it more tax-efficient for investors.

Published Apr 1, 2026 3 Min Read

Copy Link

Introduction

Share buybacks have emerged as a popular corporate action in India, often used by companies to reward shareholders and optimise their capital structure. However, the taxation of buybacks has undergone a significant shift with the introduction of Budget 2026. This has left many investors, startup founders, and employees with questions about the implications on their tax outflows, reporting requirements, and post-tax returns.

Previously, companies bore the brunt of the buyback tax, making the process relatively straightforward for shareholders. However, Budget 2026 has redefined buyback taxation, moving the tax liability from companies to shareholders by categorising buyback proceeds as capital gains. This change has led to widespread confusion about how buyback transactions are now taxed and how to calculate the net returns.

In this article, we will break down the concept of share buybacks, the taxation rules before and after Budget 2026, and how these changes impact different types of investors.

What is share buyback and how it works

Meaning of share buyback

A share buyback occurs when a company repurchases its shares from existing shareholders, reducing the number of shares in circulation. For instance, if you own 100 shares of a company and it announces a buyback at Rs. 500 per share, you can sell some or all of your shares back to the company at the offered price.

By reducing the number of outstanding shares, the company increases the earnings per share (EPS), which can positively impact its stock price.

Why companies prefer buybacks over dividends

Companies often prefer buybacks over dividends for several reasons:

Cash distribution flexibility: Unlike dividends, buybacks do not create an ongoing obligation for companies to distribute cash.
Improved EPS: By reducing the number of outstanding shares, buybacks can improve EPS, making the company more attractive to investors.
Market signalling: A buyback is often seen as a sign that a company believes its stock is undervalued, boosting investor confidence.

Types of buybacks in India

There are two primary types of buybacks in India:

Open market buyback: The company repurchases shares from the stock market over a period of time.
Tender offer buyback: Shareholders are invited to tender their shares at a fixed price within a specific timeframe.

How buyback taxation worked before Budget 2026

Buyback tax at company level

Before Budget 2026, companies were required to pay a buyback tax at 20% (plus surcharge and cess) on the difference between the buyback price and the issue price of the shares. This tax was paid by the company, and shareholders received the buyback proceeds tax-free.

Why shareholders paid no capital gains tax earlier

Under the old system, shareholders were exempt from paying capital gains tax on buyback proceeds because the company had already paid the buyback tax. This made buybacks an attractive option for investors seeking tax-free returns.

Common investor understanding under the old system

Most investors assumed that buybacks were a tax-efficient way to realise returns compared to dividends, as the tax burden was borne entirely by the company. This perception made buybacks a preferred choice for many shareholders.

What changed in buyback taxation after Budget 2026

Shift from buyback tax to capital gains tax

Budget 2026 introduced a significant change by removing the buyback tax at the company level and shifting the tax liability to shareholders. Now, buyback proceeds are treated as capital gains, and shareholders are required to pay tax on the difference between the buyback price and the cost of acquisition.

Effective date and applicability

The new rules apply to all buybacks announced on or after 1st April 2026. Any buybacks initiated before this date continue to follow the old taxation regime.

Reason behind the government’s move

The government introduced this change to ensure tax neutrality between dividends and buybacks. By taxing buyback proceeds as capital gains, the aim is to create a level playing field and simplify the tax structure.

Buyback under capital gains tax explained simply

How capital gains arise in buyback transactions

Capital gains in a buyback transaction are calculated as the difference between the buyback price and the cost of acquisition of the shares. For example, if you bought shares at Rs. 200 and sold them back to the company at Rs. 500, your capital gain would be Rs. 300 per share.

Difference between short-term and long-term capital gains

Short-term capital gains (STCG): If the shares are held for less than one year, the gains are classified as STCG and taxed as per your income tax slab.
Long-term capital gains (LTCG): If the shares are held for more than one year, the gains are classified as LTCG and taxed at 12.5% for listed shares.

Applicable tax rates for different investors

Listed shares: LTCG is taxed at 12.5%, while STCG is taxed at the applicable income tax slab rate.
Unlisted shares: LTCG is taxed at 20% with indexation benefits, while STCG is taxed at slab rates.

Capital gains tax rates on buyback after Budget 2026

Tax rates for listed shares

For listed shares, the tax rates are as follows:

LTCG: 12.5% (holding period >1 year)
STCG: As per income tax slab (holding period <1 year)

Tax rates for unlisted shares

For unlisted shares, the tax rates are:

LTCG: 20% with indexation benefits (holding period >2 years)
STCG: As per income tax slab (holding period <2 years)

Impact of surcharge and cess

The final tax outgo increases due to the addition of surcharge and cess. For instance, high-income individuals may face a surcharge of up to 37%, significantly increasing the effective tax rate.

Buyback tax impact on different types of investors

Retail investors

Retail investors may experience reduced net returns due to the additional tax liability. For instance, LTCG on listed shares is now taxed at 12.5%, compared to the earlier tax-free regime.

Startup founders and promoters

Large-scale buybacks can have significant tax implications for startup founders and promoters, particularly for unlisted shares. This may also affect the valuation of Employee Stock Ownership Plans (ESOPs).

Employees holding ESOP shares

Employees who participate in ESOP buybacks must now account for capital gains tax, which can complicate their tax planning.

Foreign investors

Foreign investors may face withholding taxes, and their tax liability could vary based on the tax treaties between India and their home country.

Buyback vs dividend taxation after Budget 2026

Tax treatment comparison

Under the new regime, both buybacks and dividends are taxed at the shareholder level, creating tax parity between the two.

Cash flow impact for shareholders

Dividends provide a predictable cash flow, while buybacks offer flexibility in timing the sale of shares.

Comparison table

Aspect	Buyback	Dividend
Tax liability	Capital gains tax	Dividend income tax
Tax rate	LTCG: 12.5%, STCG: slab rate	As per income tax slab
Timing of tax	On sale of shares	On receipt of dividend

Practical examples of buyback tax calculation

Example for listed company buyback

If you bought 100 shares at Rs. 200 each and sold them back to the company at Rs. 500, your LTCG would be Rs. 30,000. Tax at 12.5% would be Rs. 3,750.

Example for unlisted company buyback

For unlisted shares bought at Rs. 100 and sold at Rs. 400, LTCG would be Rs. 300 per share. Tax at 20% with indexation would apply.

Common calculation mistakes investors make

Investors often forget to adjust the acquisition cost for bonuses or splits, leading to incorrect tax calculations.

Reporting buyback capital gains in income tax return

Which ITR form to use

Salaried individuals can report buyback gains in ITR-2.

Disclosure requirements

You must disclose details of the buyback transaction, including the date of acquisition, sale, and the amount of capital gains.

Advance tax and compliance considerations

Ensure timely payment of advance tax to avoid penalties and interest.

How buyback tax changes affect investment decisions

Impact on long-term investors

Long-term investors may need to reassess their holding strategies to optimise tax efficiency.

Impact on short-term traders

Traders may find buybacks less attractive due to the higher tax burden on short-term gains.

Corporate behaviour going forward

Companies may shift towards dividends as a preferred mode of rewarding shareholders.

Common misunderstandings about buyback taxation

Is buyback still tax-free for shareholders?

No, buyback proceeds are now subject to capital gains tax.

Does company still pay buyback tax?

No, the tax liability has shifted to shareholders.

Is buyback always worse than dividend now?

Not necessarily. The tax impact depends on individual circumstances.

Conclusion

Budget 2026 has introduced a paradigm shift in the taxation of share buybacks by treating them as capital gains. While this change aims to create tax parity with dividends, it has brought new complexities for investors. By understanding the updated rules and their implications, investors can make informed decisions and optimise their post-tax returns.

As taxation rules evolve, staying informed and seeking professional advice can help you navigate the changes effectively.

Frequently asked questions

How is the taxable amount calculated for a share buyback after April 2026?

Under the updated rules effective April 2026, taxation is applied only on the actual profit earned from the buyback transaction, not the full amount received. The taxable gain is calculated by subtracting the Cost of Acquisition from the Buyback Price. For instance, if shares were purchased at 400 and bought back at 600, the taxable capital gain is 200 per share. This change ensures fair taxation by focusing only on real gains, unlike earlier rules where the entire buyback amount was taxed.

What are the specific tax rates for retail investors in a buyback?

Retail investors are taxed based on whether their gains qualify as long-term or short-term. If listed shares are held for more than 12 months, gains are treated as Long-Term Capital Gains and taxed at 12.5% on amounts exceeding 1.25 lakh annually. If held for 12 months or less, gains are classified as Short-Term Capital Gains and taxed at 20% when sold through a stock exchange. For off-market transactions, gains may be taxed according to the investor’s applicable income tax slab.

Why did the government change the "deemed dividend" rule introduced in 2024?

The deemed dividend rule introduced earlier taxed the entire buyback amount as income, including the investor’s original investment. This created an unfair tax burden and often resulted in situations where investors showed losses on paper but still paid taxes. The 2026 revision was introduced to correct this issue by aligning taxation with actual economic gains. By treating buybacks as capital transactions, the new system ensures that only real profits are taxed, making the structure more logical and investor-friendly.

Do promoter shareholders pay a higher tax rate than retail investors?

Yes, the revised tax framework introduces a differentiated structure for promoters. While retail investors continue to pay standard capital gains tax based on holding period, promoter shareholders are subject to higher effective tax rates. Corporate promoters may face a capped rate of around 22%, while non-corporate promoters, such as individual founders, may be taxed at around 30%. This approach helps prevent misuse of buybacks as a tax-saving alternative to dividends and ensures equitable taxation across different investor categories.

Can I still claim a capital loss if my shares are bought back?

Yes, investors can claim a capital loss if the buyback price is lower than their original purchase cost. The loss is calculated as the difference between the Cost of Acquisition and the Buyback Price. This loss can be set off against other capital gains in the same financial year or carried forward for up to eight years. Unlike earlier rules where losses were artificially created, the updated framework ensures that losses are recognised only when there is an actual financial loss.

How does buyback taxation compare to dividend taxation now?

After April 2026, buybacks are generally more tax-efficient for long-term investors. Dividends are taxed at the investor’s applicable income tax slab rate, which can be quite high for individuals in higher brackets. In contrast, buybacks are taxed only on the profit portion at lower capital gains rates, especially 12.5% for long-term holdings. This means investors can retain a larger portion of their returns through buybacks, making them a more attractive option compared to dividend payouts.

Is there any TDS (Tax Deducted at Source) on buyback proceeds?

Under the earlier regime, companies were required to deduct TDS on buyback proceeds when treated as deemed dividends. However, from April 2026, as buybacks are taxed under capital gains, the responsibility of tax payment shifts to the investor. Investors must calculate and pay taxes through advance tax or while filing their income tax return. This change simplifies the process and gives investors more control over tax planning, although they must ensure proper compliance and timely reporting.

What happens to shares held for less than 12 months (Short-Term)?

If shares are held for 12 months or less, any profit from the buyback is treated as Short-Term Capital Gains. For listed shares sold through a stock exchange, these gains are taxed at a flat rate of 20%. If the transaction does not involve a stock exchange, such as in certain unlisted cases, the gains are added to the investor’s total income and taxed according to their income tax slab. Therefore, the holding period plays a crucial role in determining the tax liability.

Does the 1.25 lakh exemption for LTCG apply to buybacks?

Yes, the exemption threshold for Long-Term Capital Gains also applies to buyback transactions involving listed equity shares. Investors can claim exemption on the first 1.25 lakh of total long-term capital gains in a financial year. This includes gains from shares, equity mutual funds, and buybacks combined. Tax at 12.5% is applicable only on gains exceeding this limit. This provision helps reduce the tax burden for small and moderate investors participating in buyback transactions.

How should I report buyback gains in my Income Tax Return (ITR)?

From the financial year 2026-27 onwards, buyback gains must be reported under the Capital Gains section of the Income Tax Return. Investors need to provide details such as purchase date, acquisition cost, buyback date, and sale consideration. Most salaried individuals with such gains typically use ITR-2 for filing. It is important to maintain proper documentation, such as contract notes or buyback statements, to ensure accurate reporting and avoid discrepancies during tax assessment.

Show More Show Less

A Comprehensive Guide to Calculating the Valuation of Your House

Feb 02, 2024

Latest RBI guidelines for Home Loan that you should know

May 25, 2021

Home Loan Tax Benefits: A Detailed Guide

Jan 02, 2024

Things you need to know about pre-approved Home Loan

Documents required to apply for Home Loan

Home Loan eligibility criteria for salaried

Tips to increase your Home Loan eligibility

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
Invest in fixed deposits and mutual funds on the app.
Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
Apply for Insta EMI Card and get a pre-qualified limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
Shop from over 100+ brand partners that offer a diverse range of products and services.
Use specialised tools like EMI calculators, SIP Calculators
Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.
For customer support, call Personal Loan IVR: 7757 000 000

Buyback Under Capital Gains Tax - Meaning, Rules and Budget 2026 Updates

Check your pre-approved home loan offer in just a few clicks

Introduction

What is share buyback and how it works

Meaning of share buyback

Why companies prefer buybacks over dividends

Types of buybacks in India

How buyback taxation worked before Budget 2026

Buyback tax at company level

Why shareholders paid no capital gains tax earlier

Common investor understanding under the old system

What changed in buyback taxation after Budget 2026

Shift from buyback tax to capital gains tax

Effective date and applicability

Reason behind the government’s move

Buyback under capital gains tax explained simply

How capital gains arise in buyback transactions

Difference between short-term and long-term capital gains

Applicable tax rates for different investors

Capital gains tax rates on buyback after Budget 2026

Tax rates for listed shares

Tax rates for unlisted shares

Impact of surcharge and cess

Buyback tax impact on different types of investors

Retail investors

Startup founders and promoters

Employees holding ESOP shares

Foreign investors

Buyback vs dividend taxation after Budget 2026

Tax treatment comparison

Cash flow impact for shareholders

Comparison table

Practical examples of buyback tax calculation

Example for listed company buyback

Example for unlisted company buyback

Common calculation mistakes investors make

Reporting buyback capital gains in income tax return

Which ITR form to use

Disclosure requirements

Advance tax and compliance considerations

How buyback tax changes affect investment decisions

Impact on long-term investors

Impact on short-term traders

Corporate behaviour going forward

Common misunderstandings about buyback taxation

Is buyback still tax-free for shareholders?

Does company still pay buyback tax?

Is buyback always worse than dividend now?

Conclusion

Frequently asked questions

Related articles

Related Videos

You are here

Related Links

Bajaj Finserv app for all your financial needs and goals

Disclaimer