The taxation of share buybacks in India has come full circle, reflecting the government’s continuing effort to balance revenue considerations with anti-avoidance safeguards. Before 2013 buybacks were treated akin to a sale of shares, with shareholders taxed on the resulting capital gains. There was no tax incidence at the company level, making buybacks an attractive and tax-efficient route for distributing surplus cash. However, this shareholder-centric regime raised concerns for policymakers, as companies increasingly used buybacks to sidestep the then-prevailing dividend distribution tax, thereby corroding the tax base.
In 2013 the rules changed and a new buyback tax was introduced, similar to the prevailing dividend distribution tax. Under that system, the company had to pay buyback tax on distributed income at the effective tax rate of 23.3%. The objective of that amendment was to curb tax arbitrage between dividends and buybacks.
While intended to streamline , the system posed several issues such as uniform levy of tax regardless of gains in the hands of individual shareholders and foreign shareholders could not claim foreign tax credit (resulting in double taxation) for taxes paid by the company in India.
Still, that regime worked very well for Indian promoters, who ended up paying less tax overall as they were otherwise chargeable to tax at 30% (plus surcharge and cess) on short term capital gains. As a result, companies switched to buybacks instead of dividends, taking advantage of available tax arbitrage.
Tax authorities eventually plugged this loophole, which led to yet another change in 2024. The buyback tax was scrapped, and buyback amounts started being taxed as dividends in the hands of shareholders. The law shifted the incidence of tax from the company to the shareholder by treating buyback consideration received as deemed dividend income.
Policy evolution
This change significantly increased the burden for individuals in higher tax brackets as the whole buyback proceeds was to be considered as dividend income and not net buyback income i.e. buyback proceeds less cost of acquisition. At the same time, the cost of acquisition was available as capital loss that could be set off against other capital gains, often resulting in a timing mismatch or even permanent loss of tax benefits.
Recognising these challenges, the original proposed a course correction. It sought to tax buyback proceeds under the head capital gains instead of treating them as dividend income taxed as income from other sources. This was a welcome move as it restored the fundamental principle of taxing only real gains—i.e. the sale consideration less the cost of acquisition—and accordingly aligned buybacks with other share transfer transactions.
However, uncertainty regarding the applicable surcharge rates led to a confusion on whether a 12% surcharge, similar to that under the erstwhile buyback tax regime would apply. The Finance Bill 2026 amendment has now clarified this by setting a flat 12% surcharge on capital gains from buybacks. This change affects individual promoters (as defined under the Companies Act 2013 or those holding more than 10% shares), altering their effective tax rate.
Since the amendment to the Finance Bill 2026 referred to Section 69 and not specifically Section 69(2), it created confusion that a flat 12% surcharge might apply to all buybacks, whether shareholders were promoters or not. However, the income tax department has clarified that the 12% surcharge applies only to promoters on capital gains from buybacks. For non-promoters, surcharge will still follow the applicable slab rates under the Finance Bill.
Promoter impact
This change may affect individual promoters participating in buybacks, especially those earning up to ₹50 lakh or between ₹50 lakh and ₹1 crore. Earlier, no surcharge applied up to ₹50 lakh, and a 10% surcharge applied between ₹50 lakh and ₹1 crore. Now, a flat 12% surcharge applies to buyback gains regardless of income slab, increasing their overall .
Conversely, individual promoters whose income level exceeded ₹1 crore would previously face a 15% surcharge on buyback tax. Under the proposed amendment, their surcharge is reduced from 15 % to 12%, resulting in a slightly lower effective rate of tax. For large buybacks, where gains often exceed ₹1 crore, such individual promoters will now benefit from a 3% surcharge reduction, making buybacks relatively more attractive than before.
Sandeepp Jhunjhunwala is partner, Nangia Global, and Sanjay Kumar is director, Nangia Global.