Budget 2026 Reclassifies Buyback Gains as Capital Gains, Creating Divergent Impact
In a significant policy shift announced during the Union Budget 2026-27 presentation on Sunday, Finance Minister Nirmala Sitharaman has declared that gains from share buybacks will now be treated as capital gains for all investors starting from the next fiscal year. This move marks a return to the taxation framework that existed prior to 2024 and is expected to substantially reduce the tax burden for numerous shareholders across India's financial markets.
Tax Relief for Non-Promoter Shareholders
Under the new provisions, gains realized from buybacks will be taxed at standard capital gains rates—specifically 12.5% for long-term holdings (exceeding 12 months) and 20% for short-term holdings (less than 12 months). This represents a notable departure from the previous system where such gains were categorized under 'income from other sources' and taxed according to applicable income tax slabs of 10%, 20%, and 30%.
Expert analysis suggests this change will predominantly benefit non-promoter shareholders. Bijal Ajinkya, Partner at Khaitan and Co., emphasized that "non-promoters will now pay a 12.5% capital gains tax on buybacks, which is effectively lower than previous rates." However, Rohit Jain, Managing Partner at Singhania & Co., noted a minor exception: investors in the lowest income tax bracket (10%) might experience a slight increase to 12.5%. Nevertheless, for the majority of investors in higher tax brackets (20% or 30%), the transition to capital gains taxation offers clear financial advantages.
Differential Taxation for Promoter Shareholders
While retail and institutional investors stand to gain, promoter shareholders face a more complex scenario. The budget introduces a "differential buyback tax" specifically for promoters, resulting in effective tax rates of 22% for corporate promoters and 30% for non-corporate promoters. This structured approach limits the benefits that promoter groups can derive from the policy change.
The distinction between corporate and non-corporate promoters is crucial. Corporate promoters, such as Tata Sons for Tata Consultancy Services (TCS) and Vama Sundari Investments for HCL Technologies, will be taxed at 22%. In contrast, non-corporate promoters—including individuals like Nandan Nilekani of Infosys and various trusts—will face a higher rate of approximately 30% on gains from tendering shares in buybacks.
Potential Impact on Corporate Behavior and Market Dynamics
Industry experts anticipate that this revised taxation framework could influence corporate strategies, particularly within the information technology sector. Amit Chandra, Vice-President at HDFC Securities, observed that "IT services companies might engage in more buybacks going forward as it is beneficial for retail shareholders and corporate promoters who now have fixed tax rates."
Ketan Dalal, Managing Director of Katalyst Advisors, highlighted that IT companies, often characterized by low capital expenditure requirements, frequently accumulate surplus funds. "Given the amendments in the budget, which restore capital gains treatment for those tendering shares in buybacks, it will make it less taxing for non-promoter shareholders to participate," Dalal explained. He further noted that promoters typically refrain from tendering shares in buybacks, potentially leading to increased promoter holdings due to reduced capital bases post-buyback.
Definitional Considerations and Regulatory Framework
The new regulations also raise questions about promoter classification, especially for unlisted companies. For listed entities, the Securities and Exchange Board of India (SEBI) defines promoters under its Issue of Capital and Disclosure Requirements Regulations, 2018. Gouri Puri, Partner at Shardul Amarchand Mangaldas, clarified that for unlisted companies, the definition expands to include anyone holding directly or indirectly more than 10% of the company, or those exercising control regardless of shareholding percentage.
This comprehensive overhaul of buyback taxation reflects the government's nuanced approach to balancing investor interests while ensuring equitable revenue collection. As companies and investors adapt to these changes, the long-term effects on shareholder returns and corporate financial strategies will become increasingly evident in the coming fiscal years.
