Share buyback tax calculation: How the Finance Bill 2026 proposal will boost shareholder savings

One key change introduced by the Finance Bill 2026 is how buybacks will be taxed from now on. A buyback is when a company buys its own shares from shareholders, usually at a higher price than the market price.

Companies do this to return cash to shareholders, reduce the number of shares, distribute surplus funds, and improve financial ratios, among other things.

Currently, the amount received by a shareholder in a buyback is treated as a dividend and taxed as ‘Income from Other Sources’ at individual slab rates.

However, the cost of acquisition of the shares extinguished in the buyback is allowed as a capital loss under Section 69 of the Income Tax Act, 2025.

What has the Finance Bill 2026 proposed?

The Finance Bill 2026 has proposed that the amount received by shareholders on the buyback of shares by a company shall be chargeable to tax under the head ‘Capital Gains’. Further, an additional tax is proposed to be levied on promoters to remove the incentive to use buybacks for tax advantage. The tax on gains in buybacks for domestic companies (promoters) will be 22% and 30% for promoters other than domestic companies.

“It is proposed that consideration received by a shareholder on buy-back shall be chargeable to tax under the head “Capital Gains” instead of being treated as dividend income. It is also proposed to provide for a differential rate for promoters wherein the effective rate on gains in buyback will be 22% for promoters that are domestic companies and 30% for promoters other than domestic companies,” Finance Minister Nirmala Sitharaman said in her Budget speech. 

Presently, promoters have the option to use buybacks to take money out of the company with lower tax, which is referred to as tax arbitrage. As a result, minority shareholders often lose out on benefits. Now, buybacks will be taxed as capital gains for everyone, instead of ‘income from other sources’, with extra tax for promoters. 

How will the new proposal help shareholders?

Simply put, earlier, when a company bought back its shares, the amount received by shareholders was treated as a dividend and taxed under the ‘Income from Other Sources’. Shareholders had to pay tax on the entire amount received in a buyback programme without deducting the original cost of the shares. Now, buybacks will be treated as sales of shares and taxed as capital gains, allowing shareholders to deduct their purchase cost from the buyback price and pay tax only on the actual gain made. 

Let’s understand this with an example calculation:

Earlier, if you bought 1,000 shares of a company at ₹200 per share:

• Total cost = ₹2,00,000

• The company announces a buyback at ₹500 per share

You receive ₹5,00,000 and pay tax on the whole amount as per your tax slab. Assuming the 30% tax slab, the total tax on this amount will be ₹1,50,000, plus health and education cess and surcharge on a case-to-case basis.

As per the Finance Bill's proposal, you will now pay tax only on the gains you made:

• ₹5,00,000 − ₹2,00,000 = ₹3,00,000 (capital gains)

If it is a long-term gain, the tax rate will be 12.5% on gains above ₹1.25 lakh (provided you don’t have any other long-term capital gains).

• Therefore, the tax will be 12.5% of (3,00,000 - 1,25,000) = ₹21,875

Thus, compared to the previous rule, the new rule proposed in the Finance Bill 2026 leads to a tax saving of over ₹1.28 lakh in this example.

In case of short-term capital gains, the tax rate will be 20%.

Under the new rule, promoter shareholders will pay capital gains tax and an additional buyback tax at an effective rate of 22% or 30%.

This amendment will come into effect on April 1, 2026. “These amendments shall take effect from the 1st day of April, 2026, and shall apply in relation to the tax year 2026-27 and subsequent tax years,” the tax department said.