New Delhi, Feb 1 (PTI) To protect minority shareholders and curb tax arbitrage by promoters, Finance Minister Nirmala Sitharaman on Sunday announced a major overhaul of the taxation framework governing share buybacks.

Presenting the Union Budget 2026-27, Sitharaman said that buybacks will be taxed as capital gains for all categories of shareholders.

"In the interest of minority shareholders, I propose to tax buyback for all types of shareholders as Capital Gains," she said.

To discourage misuse of tax arbitrage, promoters will be subject to an additional buyback tax, raising the effective tax rate to 22 per cent for corporate promoters and 30 per cent for non-corporate promoters, she stated.

Sitharaman said, "Change in taxation of buyback was brought in to address the improper use of buyback route by promoters".

The Income Tax Department on X said, "The buyback taxation has been simplified with benefits to small shareholders".

Under the proposal, shareholders other than promoters will pay tax on such gains at the applicable capital gains tax rate. That is 12.5 per cent for long term capital gains, listed and unlisted and 20 per cent on short term listed, and applicable rate on short term unlisted.

However, to prevent promoters from misusing the buyback, they have to pay additional income tax. Where a domestic company is a promoter, they will pay effective tax of 22 per cent on gains on buyback and where promoter is other than a domestic company, they will pay effective tax of 30 per cent on gains on buyback.

"For promoters, the tax liability will largely remain similar if it is taxed as dividend in their hands," the Income-Tax department stated on X.

Market experts believe that the proposal to tax buyback proceeds as capital gains for all shareholders, ensures that tax applies only to the real gain. Further, the higher tax burden on promoters may lead companies to reassess their capital allocation strategies between dividends and buybacks.

This move aligns buybacks with normal share sales for minority and retail interests while safeguarding revenue, the expert said.

Roop Bhootra, Whole-time Director, Anand Rathi Share and Stock Brokers, said the proposed move is a positive for individual shareholders as tax liability reduces from 30 per cent (highest slab rate) to capital gains rates (short term 20 per cent and long-term 12.5 per cent) and negative for corporates and discourages buyback and pushes corporates to use reserves for capital expenditure and/or R&D.

Addressing a post-budget conference, Revenue Secretary Arvind Shrivastava also said that it was a "relief" for shareholders.

"It’s not a tax, additional tax, it is a relief. The buyback tax system was changed to make it a dividend income, which is income at the applicable income tax rate at the hand of the shareholder." "The whole objective of doing that change at that time was a misuse of a tax arbitrage by promoters. So the change made for promoters is that an additional buyback tax on them, which again keeps things status quo for them. So even today, the marginal rate at which they would have been charged," he added.

Earlier, share buybacks were taxed mainly at the company level, with shareholders facing uneven or unclear outcomes. After the 2024 change, buyback proceeds are taxed in the hands of shareholders, often at applicable slab rates, on the entire receipt without allowing deduction for the cost of acquisition, market experts said.

"The amendment in buyback taxation to treat it as capital gains as earlier is positive for retail and non-promoter shareholders. Even for promoter shareholders, it enables offsetting the cost against the buyback proceeds and the additional income tax is payable on the capital gains," Vaibhav Gupta, Partner, Dhruva Advisors, said.

Parizad Sirwalla, Partner and Head, Global Mobility Services- Tax, KPMG in India, said that revamp of buyback tax framework will influence investor behaviour and short-term sentiments.

In market parlance, buyback tax is a kind of tax levied on companies that buyback their own shares from shareholders. Generally, governments impose this tax to restrain firms from distributing profits to shareholders through share buybacks rather than paying dividends. PTI SP DP MR