BT Explainer | New income tax rule on share buybacks - Who will be impacted? Investors or promoters, and how

With the start of the financial year 2026-27 (FY27), the government has introduced key changes in the taxation framework for share buybacks, altering how gains from such transactions are taxed. As per recent amendments to the Finance Bill, a flat 12 per cent surcharge will now apply on capital gains arising from share buybacks. However, the revised structure primarily impacts company promoters, while retail and individual investors are unlikely to face any adverse impact.

What has changed in buyback taxation

Sharing an overview of the changes to share buybacks effective April 1 under the new I-T rules, InCred Money said, "When a company buys back its own shares, it is essentially returning cash to its shareholders like a cash dividend. Until now, the government taxed the company on this payout and the tax was calculated on the full amount paid out, regardless of whether the shareholder actually made a profit. This often meant an effective tax burden up to 30 per cent or more (depending upon your tax slab), making buybacks an unattractive option for everyone involved. From April 1, 2026, that changes. The tax now falls on the shareholder, and more importantly, only on the actual profit made."

While explaining, it cited, "So if you bought shares at Rs 200 and the company buys them back at Rs 500, you are taxed only on the Rs 300 gain, not the full Rs 500. The tax rates are simple: 12.5 per cent if you held the shares for over a year, and 20 per cent if you held them for less."

Promoters face higher effective tax burden

Incred noted that for company promoters, the rules are stricter. "Promoter of a domestic company pays 22 per cent for LTCG (Long-Term Capital Gain) and STCG (Short-Term Capital Gains) while promoter of a non-domestic company pays 30 per cent. They pay an extra layer of tax on their gains, with a 12 per cent surcharge on top of that additional amount. The government's intent is clear to prevent large shareholders from using buybacks as a loophole to extract cash from their own companies at a lower tax cost than other methods," it stated.

Retail investors see no negative impact

For retail investors, mutual funds and other minority shareholders, the revised rules are largely neutral to positive.

"For everyone else, such as retail investors, mutual funds or ordinary shareholders, the new rules are straightforwardly better. Lower tax, simpler logic, and a framework that finally rewards long-term holding," Incred added.

Offering a similar view, Ravi Singh, Chief Research Officer at Mastertrust, stated, The government has tightened things for promoters, who may now face higher effective taxes, reducing the scope for earlier arbitrage strategies. Overall, this is a positive shift for retail investors. It improves post-tax returns and makes buybacks attractive again."

Singh added, "Going forward, we could also see a pickup in buyback activity, especially from cash-rich companies, making them relevant once again for event-driven trading strategies."