Income Tax on Buyback of Shares

Buyback of shares is a process whereby a company repurchases its own shares form existing shareholders by paying them the prevailing market value. In this process the company reduces the number of outstanding shares and regains ownership previously held by investors. Buybacks are generally used to improvise financial ratios, consolidate ownership, and increases shareholder value. 

Budget 2026 - Changes in Buyback Taxation

In Budget 2026, it was proposed by the finance mister to tax buyback of shares as capital gains in the hands of the investors. Previously buyback of shares were taxed at applicable slab rates and not as capital gains. 

As per the changes, LTCG and STCG will be levied on gains from buyback accordingly. 

Income Tax Provisions For Buyback of Shares

Any gains from buyback of shares will be treated as capital gains with effect from 1st April 2026 i.e., for FY 2026-27 and onwards. 

Shares bought back that were held for more than 12 month will attract long term capital gains at 12.5% with an exemption of up to Rs. 1.25 lakhs. However, shares held up to 12 months will be taxed at short term capital gains at 20%. 

In case of promoters shares, the effective tax rate will be 30% for individual promoters and 22% for corporate promoters. 

Reasons for Buyback

A company raises share capital by distributing shares and raising capital. Therefore it may seem contradictory for companies to buy back the shares and pay money to shareholders. The reasons for the same can be as follows:

• Compact Ownership: Substantial shareholding implies widespread ownership and higher costs to the company. So in order to serve both the motives that is to bring compactness in ownership and reduce the cost of capital, buyback of shares comes into the picture.
• Share Price Correction: The market price of the shares can be highly undervalued due to various reasons. Hence a buyback supports the correction of the market price.
• Attractive Financials: The buyback of shares can also make a company’s financials look more attractive. With a reduced number of shares, the Earning per Share of the company looks more attractive.
• Increased Shareholding of Promoters: Buyback is often used if the promoters of a company are planning to increase their shareholding.

Also Read:
1. Budget 2026 Highlights