Presently, since buybacks are handled as dividends, the relevant tax slab will resolve the speed of tax
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Tax rise to pay for Coronavirus COVID-19 disaster
Funds 2026 has proposed a key change to how buybacks might be taxed on listed shares from FY27.
Presently, the consideration acquired on buyback of shares is handled as dividend — taxable as per an individual’s relevant tax slab. Whereas the consideration was thus taxed, the price of acquisition of shares so purchased again was allowed to be claimed as a capital loss, which might be used to set off in opposition to another capital achieve.
If the proposal within the Finance Invoice, 2026 have been to return into impact, buybacks might be taxed as capital beneficial properties itself — the distinction between the consideration acquired and price of acquisition (inflated by immediately attributable prices similar to brokerage) of the shares purchased again, serving as the quantity of capital achieve. In case of long-term capital beneficial properties, the relevant tax price is 12.5 per cent and it’s 20 per cent for short-term beneficial properties. The holding interval required to qualify as a long-term capital asset stays unchanged at greater than 12 months.
Nonetheless, the above tax charges are relevant just for public shareholders. For promoters although, the tax price is greater, though buybacks might be handled as capital beneficial properties.
First is the case of company promoters included in India. Right here, the tax price is 22 per cent for each long-term and short-term beneficial properties. In case of another sort of promoter (particular person, international company amongst others), the tax price is 30 per cent for each long-term and short-term beneficial properties.
In case you are a public shareholder, how does your tax legal responsibility change? Right here is an evaluation.
Presently, since buybacks are handled as dividends, the relevant tax slab will resolve the speed of tax. On this instance the taxpayer is assumed to have opted for the extra useful new regime, the place revenue as much as ₹12 lakh carries no tax legal responsibility. If her whole revenue together with buyback falls inside ₹12 lakh (₹12.75 lakh for salaried taxpayers), she may get away with out paying any tax.
Nonetheless, if the proposed taxation comes into impact, long-term capital achieve price of 12.5 per cent or a short-term capital achieve price of 20 per cent will apply. Provided that her whole revenue together with the capital achieve on buyback doesn’t exceed ₹4 lakh, she may get away with paying no tax. It’s because, the utmost revenue not chargeable to tax remains to be ₹4 lakh and it is just because of the existence of a rebate (as much as ₹60,000) {that a} taxpayer’s legal responsibility is made zero, even when whole revenue reaches as much as ₹12 lakh or ₹12.75 lakh, because the case could also be. Nonetheless, the rebate doesn’t apply for long-term and short-term capital beneficial properties tax on listed shares. Thus, if a taxpayer’s whole revenue (together with the buyback capital achieve) exceeds ₹4 lakh, the tax legal responsibility will work out to a sum of (a) and (b). (a) being the capital beneficial properties tax on buyback and (b) being the tax on revenue aside from the buyback, calculated as per the relevant tax slabs.
The illustration explains how taxation beneath new proposal will play out beneath completely different eventualities.
General this can be a welcome transfer. Previous to the change in buyback tax guidelines to the present rule within the 2024 Funds, there was tax arbitrage benefit in selecting buyback as the way in which to return capital as an alternative of dividends. Whereas this was seen pretty much as good for traders, it was not totally so. Each buyback and dividends are return of traders’ cash to them. When cash was returned through buybacks, there was logic for some traders to think about it as a sign from administration/board that they have been optimistic on the lengthy prospects of the corporate and seen the shares as undervalued. Thus the tax arbitrage benefit of buybacks was creating distortions in signalling.
The 2024 finances fastened this, however extra than simply fixing the tax arbitrage, it took it to an different excessive by making the buyback taxation a bit extra punitive. The proposal in 2026 Funds proposal now balances the 2. With greater taxation for promoters, it’s not within the curiosity of administration and boards to decide on buybacks because the medium to return capital except they wish to ship a sign to the markets.
Revealed on February 1, 2026
