Finance Bill amendments propose flat 12% surcharge on capital gains from buybacks

The Lok Sabha on Wednesday passed the Finance Bill, 2026, with 32 amendments including a 12% surcharge on capital gains from buybacks for individual and corporate shareholders that could make buybacks more expensive. The amendments to the Finance Bill will now be passed by the Rajya Sabha.

The flat 12% surcharge is expected to substantially increase the tax outgo for taxpayers as at present there is either nil surcharge on taxable income up to Rs 50 lakh and a 10% surcharge on taxable income between Rs 50 lakh and Rs 1 crore.

The Union Budget 2026-27 presented on February 1 had proposed to tax buyback for all types of shareholders as capital gains. But to disincentivise misuse of tax arbitrage, promoters will pay an additional buyback tax, Finance Minister Nirmala Sitharaman had said. This will make the effective tax 22% for corporate promoters and 30% for non-corporate promoters, she had said.

Sandeepp Jhunjhunwala, M&A Tax Partner at Nangia Global Advisors said that moving to a flat 12% surcharge means higher tax outgo across these brackets, making buybacks a costlier route for cash extraction compared to alternates such as dividends. “This could likely discourage individual shareholder inclination for buybacks and distort capital allocation decisions,” he said, adding that the impact of this amendment, however, would largely be limited to small and mid-sized buybacks, as large buybacks where gains exceed Rs 1 crore are already subject to a higher surcharge rate of 15%.

In fact, for larger buybacks, the amendment implies a 3% reduction in surcharge. “For corporate shareholders, the flat 12% surcharge on buyback may have an impact in situations where taxable income is up to Rs 1 crore, where no surcharge earlier applied and where taxable income falls between Rs 1 crore and Rs 10 crore, where a 7% surcharge applied,” he said.

Meanwhile, the amendment to the Finance Bill has also provided for retrospective amendments to circumstances in which approvals by income tax authority would not be considered invalid. It has clarified that electronically granted approvals in assessment, reassessment or recomputation proceedings cannot be invalidated due to inadequate reasoning, authentication defects, or absence of a digital signature, with a retrospective effect from April 1, 2021.

Jhunjhunwala said this appears to be a curative and validation provision aimed at safeguarding the legality of electronically issued documents previously. “It is particularly impactful, as it could nullify taxpayers’ positions in pending disputes and revive cases that might otherwise have been struck down due to procedural lapses,” he said.

The amendment follows the earlier proposal in Finance Bill 2026 relating to Director Identification Number (DIN), proposed to be retrospectively effective from October 1, 2019, which aimed to prevent assessments from being annulled merely on account of omission in quoting DIN.