Buyback taxation rationalised with limited relief to promoter shareholders

– Finance Bill 2026 omits deemed dividend treatment on buyback consideration 

– Payal Agarwal, Partner | corplaw@vinodkothari.com

Our quick bytes on Union Budget 2026 can be accessed here – https://vinodkothari.com/2026/02/quick-bytes-on-union-budget-2026/

The recent Finance Bill 2026 brings relief to investors in the form of changes in taxation for buyback consideration. With the omission of sub-clause (f) from Section 2(40) of the Income Tax Act, 2025 [dealing with deemed dividend], the position as it existed prior to 1st October, 2024, has been restored, except for additional tax rates in case of promoter shareholders. 

• Applicability of the amended provisions 
  • For any buyback of shares on or after 1st April, 2026 
• Existing provisions on taxability of buyback 
  • Included u/s 2(40)(f) of IT Act 
  • The entire amount paid by the company taxable as “dividend” 
  • Tax payable by shareholders 
  • Entire buyback consideration taxable as dividend 
  • TDS provisions as applicable to dividends apply 
  • Taxable at slab rates as applicable to respective shareholders, with a flat surcharge @ 15%
  • Entire cost of acquisition in respect of shares bought back to be booked as “capital loss” [section 69 of IT Act]
  • Such capital loss may be set off against capital gains subsequently
    • As per section 111 of IT Act, the set-off is available for a period of 8 AYs immediately after the AY in which loss arises 
• Amended provisions on taxability of buyback 
  • Buyback consideration not to be treated as deemed dividend [omission of clause (f) to Sec 2(40)]
  • Difference between consideration received and cost of acquisition taxable as capital gains [S. 69(1)]
    • In the hands of the recipient shareholder
  • In case of promoter shareholders, tax payable at higher rates depending on whether promoter is a domestic company or not
    • Effective rate of 22% in case of domestic company and 30% in case of persons other than domestic company 
• Meaning of promoter 
  • In case of a listed company,
    • As per Reg 2(1)(k) of SEBI (Buy-Back of Securities) Regulations, 2018
      • Refers to the definition of promoter under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 
  • In any other case
    • As per Section 2(69) of the Companies Act, 2013, or 
    • A person who holds, directly or indirectly, more than 10% of the shareholding in the company
• Example to understand taxability under old regime v/s new regime 

• Intent of the amendments 
  • The extant tax regime on treating buyback consideration as deemed dividend resulted in taxing a “receipt” as income, without factoring the cost incurred in such receipts. See our article on the same here. The amended tax regime restores back the past position, by treating the difference between the buyback consideration and cost of acquisition as capital gains. 
  • Additional tax rates have been proposed for promoters, in view of the distinct position
  • and influence of promoters in corporate decision-making, particularly in relation to buy-back transactions.

See our other resources on buyback – https://vinodkothari.com/2024/08/resource-centre-on-buyback/