BT Explainer | New share buyback rule from April 1 is less taxing for shareholders - Here's how

New Share Buyback Rule From April 1: Starting Wednesday, several key changes have come into effect in the share market, including the levy of a flat 12 per cent surcharge on capital gains arising from share buybacks, as per recent amendments to the Finance Bill.

The 12 per cent surcharge will apply to individual or corporate shareholders earning profits by tendering shares in buyback offers. The move alters the earlier surcharge structure, under which no surcharge was levied on taxable income up to Rs 50 lakh, while taxable income between Rs 50 lakh and Rs 1 crore attracted a 10 per cent surcharge on capital gains from buybacks.

The Income Tax (I-T) department has issued a clarification regarding the applicability of the 12 per cent surcharge, particularly for promoters participating in buybacks.

"It is clarified that section 69 of the Income-tax Act, 2025 provides for tax rates only in respect of additional income tax on promoters in respect of capital gains on such buyback," the I-T dept stated.

"Therefore, the rate of 12 per cent will apply only on additional income-tax to be paid by the promoters on aforesaid capital gains mentioned in section 69(2)(b)," it added.

"In the case of non-promoters, surcharge as per normal provisions will apply, if applicable on such capital gains," the tax dept further stated.

Ravi Singh, Chief Research Officer at Mastertrust, said, "From April 1, 2026, India has introduced an important change in how share buybacks are taxed. Earlier, buybacks were treated like dividends, which meant investors had to pay tax on the entire amount received -- sometimes at rates as high as 30 per cent or more -- even if their actual profit was much lower. This made buybacks quite inefficient, especially for retail investors."

He added, "Now, the rules are more logical. Buybacks will be taxed as capital gains, so you're only taxed on the profit you make -- the difference between your purchase price and the buyback price. The tax rates are in line with regular equity investments: 12.5 per cent for long-term gains (above the Rs 1.25 lakh exemption) and 20 per cent for short-term gains. At the same time, 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 further stated, "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."