[Opinion] Finance Bill 2026 – New Buyback Tax Rules and Shareholder Impact

Dindayal Dhandaria – 2026] 183 taxmann.com 453 (Article)

1. Introduction

Buyback of shares has long been used by companies as an alternative to dividend distribution. In a buyback, a company repurchases its own shares from shareholders—either through the stock exchange route or through a tender offer. Historically, buybacks were regarded as tax-efficient for shareholders because the tax incidence was largely contained at the company level and the shareholder’s receipt was exempt.

This position changed fundamentally with effect from 1 October 2024, when the Finance (No. 2) Act, 2024 shifted the incidence of taxation from the company to the shareholder by treating the buyback consideration as dividend income in the hands of shareholders. This created practical issues such as taxation on gross receipts (including return of capital) and allowance of the cost of shares only in the form of a capital loss, which could not always be effectively utilised.

Subsequently, the Finance Bill, 2026 proposes to rationalise the buyback taxation framework again under the Income-tax Act, 2025 with effect from 1 April 2026 by restoring a capital gains-based model, so that shareholders are taxed on real gains rather than on gross buyback proceeds. While this proposal appears conceptually equitable, the practical impact is not uniform. As illustrated later in this article, the proposed change may operate favourably for high-income shareholders while increasing the tax burden for small shareholders, particularly those who would otherwise fall within the rebate range under section 87A.

This article therefore explains:

the buyback taxation regime up to 30 September 2024;
the regime applicable from 1 October 2024; and
the proposed changes from 1 April 2026, along with their practical impact on different classes of shareholders.

2. Taxation of Buybacks Up To 30 September 2024 – Company-Level Tax With Shareholder Exemption

2.1 Statutory Framework

For buybacks undertaken by a domestic company up to 30 September 2024, the relevant provisions under the Income-tax Act, 1961 were:

Section 115QA – Tax on distributed income on buyback of shares by domestic companies; and
Section 10(34A) – Exemption to shareholders in respect of income arising from such buyback.

2.2 Mechanism of Taxation

Under this regime:

The domestic company was liable to pay additional income tax at 20% (plus applicable surcharge and cess) on “distributed income” arising from the buyback.
The amount received by the shareholder on buyback was exempt under section 10(34A).

2.3 Computation of “Distributed Income”

Broadly, “distributed income” for section 115QA purposes was computed as:

Buyback consideration paid by the company Less – Amount received by the company at the time of issue of such shares

Accordingly, the shareholder did not compute capital gains and did not bear tax incidence on the buyback proceeds.

2.4 Practical Consequence

This structure was particularly attractive for all shareholders, whether in a higher tax bracket or otherwise, since the buyback consideration remained fully exempt in their hands irrespective of their overall income.