Capital gains tax on share buybacks is good for small investors. Here's why
The government has shifted buyback taxation to a capital gains framework, while tightening rules for promoters who were seen as misusing buybacks as a tax-saving tool.
The Union Budget 2026 has changed how share buybacks are taxed, and despite initial confusion, the move could actually work in favour of small and long-term investors. The government has shifted buyback taxation to a capital gains framework, while tightening rules for promoters who were seen as misusing buybacks as a tax-saving tool.
Finance Minister Nirmala Sitharaman made the intent clear while announcing the change in her Budget speech.
“Change in taxation of buyback was brought in to address the improper use of buyback route by promoters. In the interest of minority shareholders, I propose to tax buyback for all types of shareholders as capital gains. However, to disincentivize misuse of tax arbitrage, promoters will pay an additional buyback tax,” she said.
WHAT WAS HAPPENING EARLIER WITH SHARE BUYBACK
Before Budget 2026, money received from a share buyback was treated as dividend income. This meant investors paid tax on the entire amount they received, based on their income tax slab, which could go up to 30%.
The cost at which the investor had originally bought the shares was not deducted upfront. Instead, it was shown separately as a capital loss, which many small investors were unable to use because they did not have other capital gains to offset it against.
Abhishek Kumar, Sebi RIA and Founder of Sahaj Money, explains that this system often hurt retail investors.
“Under the previous system, the entire buyback proceed was taxed at the investor's individual income slab rate, while the acquisition cost was treated as a separate capital loss. Many retail investors paid tax on the full amount and were left with a phantom capital loss that they often could not utilise,” he said.
WHAT HAS CHANGED AFTER BUDGET 2026
Budget 2026 moves buyback taxation back to capital gains. This means tax will now be charged only on the actual profit made by the investor, not on the full amount received.
“The new rule restores the logic of taxing only the actual profit, which is the difference between the buyback price and the purchase price, at the applicable capital gains rates,” Abhishek Kumar said.
In simple terms, investors can now deduct the price at which they bought the shares from the buyback price before calculating tax.
A SIMPLE EXAMPLE OF THE CHANGES IN SHARE BUYBACK
Suppose a small investor bought shares of a company at Rs 500 each. The company later announces a buyback at Rs 800.
Earlier, tax was charged on the full Rs 800. If the investor fell in the 30% tax bracket, they paid Rs 240 as tax, even though their actual profit was only Rs 300.
Under the new rule, tax is charged only on the Rs 300 profit. If the shares were held for more than 12 months, the tax rate is 12.5%. This means the tax payable is just Rs 37.5, a sharp drop from earlier.
WHY LONG-TERM INVESTORS BENEFIT MORE
The new system clearly favours long-term investors, especially those in higher income tax brackets.
“Long-term investors are expected to end up paying significantly less tax, as gains on shares held for over 12 months are now taxed at a flat rate of 12.5% instead of their personal income tax bracket,” Abhishek Kumar said.
He added that investors can also use the annual Rs 1.25 lakh exemption available on long-term capital gains, which was not useful under the earlier dividend-based system.
This makes buybacks more predictable and tax-efficient for investors who stay invested for the long term.
HOW PROMOTERS ARE BEING CHECKED
While the rules are simpler for retail investors, the government has tightened taxation for promoters to stop misuse.
As per the Budget announcement and official FAQs, promoters will pay an additional buyback tax so that their total tax liability comes to 22% for domestic corporate promoters and 30% for non-corporate promoters such as individuals, firms and LLPs.
“This ensures that promoters cannot bypass the higher taxes associated with dividends by simply opting for a buyback instead,” Abhishek Kumar said.
The idea is to stop companies from using buybacks mainly as a tax planning tool for promoters, while keeping the system fair for minority shareholders.
HOW INVESTORS SHOULD LOOK AT BUYBACKS NOW
From a tax point of view, buybacks and selling shares in the open market are now almost the same.
“Retail investors should now view buybacks and open market share sales as nearly identical for tax purposes, as both are governed by the same capital gains rates and holding period rules,” Abhishek Kumar said.
Dividends, however, remain different, as they continue to be taxed at the investor’s income tax slab rate without any deduction for the cost of shares.
WHAT SMALL INVESTORS SHOULD KEEP IN MIND
After this change, small investors should focus on how long they have held the shares and what their capital gains tax rate will be. Long-term gains are taxed at 12.5%, while short-term gains are taxed at 20%.
They should also watch how companies with high promoter holdings behave going forward, as the higher tax cost for promoters could reduce aggressive buyback announcements.
Overall, the Budget 2026 buyback change brings clarity, fairness and transparency. For small investors, it means paying tax only on real profits, not on paper income, and that makes buybacks a cleaner and more investor-friendly option than before.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)
The Union Budget 2026 has changed how share buybacks are taxed, and despite initial confusion, the move could actually work in favour of small and long-term investors. The government has shifted buyback taxation to a capital gains framework, while tightening rules for promoters who were seen as misusing buybacks as a tax-saving tool.
Finance Minister Nirmala Sitharaman made the intent clear while announcing the change in her Budget speech.
“Change in taxation of buyback was brought in to address the improper use of buyback route by promoters. In the interest of minority shareholders, I propose to tax buyback for all types of shareholders as capital gains. However, to disincentivize misuse of tax arbitrage, promoters will pay an additional buyback tax,” she said.
WHAT WAS HAPPENING EARLIER WITH SHARE BUYBACK
Before Budget 2026, money received from a share buyback was treated as dividend income. This meant investors paid tax on the entire amount they received, based on their income tax slab, which could go up to 30%.
The cost at which the investor had originally bought the shares was not deducted upfront. Instead, it was shown separately as a capital loss, which many small investors were unable to use because they did not have other capital gains to offset it against.
Abhishek Kumar, Sebi RIA and Founder of Sahaj Money, explains that this system often hurt retail investors.
“Under the previous system, the entire buyback proceed was taxed at the investor's individual income slab rate, while the acquisition cost was treated as a separate capital loss. Many retail investors paid tax on the full amount and were left with a phantom capital loss that they often could not utilise,” he said.
WHAT HAS CHANGED AFTER BUDGET 2026
Budget 2026 moves buyback taxation back to capital gains. This means tax will now be charged only on the actual profit made by the investor, not on the full amount received.
“The new rule restores the logic of taxing only the actual profit, which is the difference between the buyback price and the purchase price, at the applicable capital gains rates,” Abhishek Kumar said.
In simple terms, investors can now deduct the price at which they bought the shares from the buyback price before calculating tax.
A SIMPLE EXAMPLE OF THE CHANGES IN SHARE BUYBACK
Suppose a small investor bought shares of a company at Rs 500 each. The company later announces a buyback at Rs 800.
Earlier, tax was charged on the full Rs 800. If the investor fell in the 30% tax bracket, they paid Rs 240 as tax, even though their actual profit was only Rs 300.
Under the new rule, tax is charged only on the Rs 300 profit. If the shares were held for more than 12 months, the tax rate is 12.5%. This means the tax payable is just Rs 37.5, a sharp drop from earlier.
WHY LONG-TERM INVESTORS BENEFIT MORE
The new system clearly favours long-term investors, especially those in higher income tax brackets.
“Long-term investors are expected to end up paying significantly less tax, as gains on shares held for over 12 months are now taxed at a flat rate of 12.5% instead of their personal income tax bracket,” Abhishek Kumar said.
He added that investors can also use the annual Rs 1.25 lakh exemption available on long-term capital gains, which was not useful under the earlier dividend-based system.
This makes buybacks more predictable and tax-efficient for investors who stay invested for the long term.
HOW PROMOTERS ARE BEING CHECKED
While the rules are simpler for retail investors, the government has tightened taxation for promoters to stop misuse.
As per the Budget announcement and official FAQs, promoters will pay an additional buyback tax so that their total tax liability comes to 22% for domestic corporate promoters and 30% for non-corporate promoters such as individuals, firms and LLPs.
“This ensures that promoters cannot bypass the higher taxes associated with dividends by simply opting for a buyback instead,” Abhishek Kumar said.
The idea is to stop companies from using buybacks mainly as a tax planning tool for promoters, while keeping the system fair for minority shareholders.
HOW INVESTORS SHOULD LOOK AT BUYBACKS NOW
From a tax point of view, buybacks and selling shares in the open market are now almost the same.
“Retail investors should now view buybacks and open market share sales as nearly identical for tax purposes, as both are governed by the same capital gains rates and holding period rules,” Abhishek Kumar said.
Dividends, however, remain different, as they continue to be taxed at the investor’s income tax slab rate without any deduction for the cost of shares.
WHAT SMALL INVESTORS SHOULD KEEP IN MIND
After this change, small investors should focus on how long they have held the shares and what their capital gains tax rate will be. Long-term gains are taxed at 12.5%, while short-term gains are taxed at 20%.
They should also watch how companies with high promoter holdings behave going forward, as the higher tax cost for promoters could reduce aggressive buyback announcements.
Overall, the Budget 2026 buyback change brings clarity, fairness and transparency. For small investors, it means paying tax only on real profits, not on paper income, and that makes buybacks a cleaner and more investor-friendly option than before.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)