For years the way taxes were handled for share buybacks changed between two methods. Before 2024 the company paid the tax. From October 2024 to March 2026 the shareholder paid the tax and the whole amount from the buyback was treated as income from dividends. Starting April 1 2026 the situation changed back to capital gains. With a new rule that separates regular investors from those who own a lot of shares.
This change is important because the old way created a problem that many small investors did not notice until they filed their taxes.
the way and the hidden loss issue
Under the system that was in place from October 2024 to March 2026 the total amount received from a buyback was taxed as income from dividends. The cost of buying the shares was treated as a loss that could be used against gains or saved for up to eight years.
The issue was that small investors did not have enough gains to use that loss. Someone who bought shares for ₹500 and sold them in a buyback for ₹600 had to pay tax on the ₹600 at their tax rate, which could be as high as 39%. The ₹500 cost was a loss that many investors never managed to use.
The Finance Act 2026 fixed this by going to the capital gains system. Now the tax is based on the difference between the price of the buyback and the original cost of the shares not the full amount received.
how the capital gains system works for investors
For investors who own 10% or less of the company the new rules are simple.
The profit from the buyback is the buyback price minus the cost of buying the shares. This profit is then considered either term or long-term based on how long the shares were held. The time period starts from the day the shares were bought to the day the buyback is recorded.
For shares that are listed the limit is 12 months. If the shares were held for than 12 months the gain is long-term and taxed at 12.5% on gains that are more than ₹1.25 lakh in a year. If held for 12 months or less the gain is term and taxed at the standard rate.
For shares that are not listed the long-term limit is 24 months. The tax rate is 20% with benefits from inflation adjustments.
An example will help make this clearer. An investor bought shares a time ago for ₹200. The company announces a buyback at ₹1,000. The taxable gain is ₹800. For an investor that ₹800 is taxed at 12.5%, which is ₹100.
the tax on promoters. Why it matters
The same buyback that is taxed at 12.5% for a small investor is taxed much more for a promoter.
The Finance Act 2026 added a level of tax for people classified as promoters under Section 69. A promoter is someone who owns than 10% of the company or someone who has control over the company or whose advice the board usually follows. For companies that are not listed the 10% ownership is enough to be considered a promoter without formal status.
The tax is applied in layers. First the normal capital gains tax is applied. Then an extra tax is added on top of that. A 12% surcharge is added to this tax not to the whole amount of the capital gains.
The rates show this. A domestic company promoter pays about 22%. An individual promoter, including people or family groups pays about 30%.
Using the ₹800 profit example the promoter pays ₹176 if they are a company and ₹240 if they are an individual compared to ₹100 for the small investor. On the profit the promoter pays more than double.
what this change means for the market
The move back to capital gains is expected to make buybacks more attractive for investors, who now only pay tax on the actual profit, not the whole amount received. Removing the hidden loss problem makes the process easier. Lowers the tax for small shareholders.
For promoters the higher tax rate changes the situation. A 30% tax on buyback profits is much higher than the 12.5% tax they would pay if they sold the shares on the market. This might push companies that are controlled by promoters to use dividends or sell shares on the market instead of doing buybacks.
There is a planning aspect for promoters well. Since the extra tax depends on the date of the buyback and the status of the investor at that time options like timing the buyback along with events or using a holding company might become important. However tax authorities have shown they are ready to check arrangements that don’t make sense as seen in cases where buybacks through court-approved plans were questioned for being ways to avoid taxes.
what small investors should remember
The new system rewards people who hold shares for a time. Keeping shares for than 12 months before the buyback date means the gain is taxed at 12.5% instead of a higher rate, which can make a big difference between 12.5% and 30% or more.
The cost of buying the shares is more important than before. Investors should keep track of the purchase prices, including any changes to company actions like splits or bonuses because the tax is now based on the difference.
The ₹1.25 lakh exemption for long-term gains applies to all long-term gains in a year not the gain from the buyback. Investors with long-term gains from shares or mutual funds should take that into account.
FAQs
1. How are buyback payments taxed for investors from April 1 2026?
The profit, which is the buyback price minus the cost of buying the shares is taxed as capital gains. For shares held than 12 months the long-term rate is 12.5% on gains over ₹1.25 lakh. For shares held 12 months or less the gain is added to income. Taxed at the regular rate.
2. What is the tax on buybacks for promoters?
Promoters, who are shareholders with than 10% of the shares face an extra tax under Section 69. The tax rate is 22% for domestic companies and about 30% for individuals and family groups.
3. What was the hidden loss problem under the system?
Under the system that was in place the whole amount from a buyback was taxed as dividend income and the cost of buying the shares was considered a loss. Since most small investors did not have gains to use that loss it often stayed unused.
4. How is the time period for buyback taxation measured?
The time period starts from the day the shares were bought to the day the buyback is recorded. For listed shares than 12 months is long-term. For shares 24 months is the threshold.
5. Can the loss from a buyback be used against gains?
Yes. The cost of buying the shares that’s more than the buyback amount creates a loss. This loss can be used against gains or saved for, up to eight years. The loss is considered term or long-term based on how long the shares were held.
