Tax Changes Favor Investors in Budget 2026-27

In a significant announcement, Finance Minister Nirmala Sitharaman introduced changes to the taxation of share buybacks in the Budget 2026-27. This change aims to benefit individual investors, particularly minority shareholders, by taxing buyback proceeds as capital gains rather than as dividend income. This shift is crucial for ensuring fairness in the taxation process.

Under the current system, when a company buys back its shares, the entire amount was treated as dividend income, which included taxing the original investment. This created an unfair situation where investors were taxed on their initial investment, a situation that has now been corrected. From now on, shareholders will only be taxed on the actual gains from the buyback, making it a more favorable scenario for investors.

However, the Finance Minister also proposed additional taxes for promoters, setting the effective tax rate at 22% for corporate promoters and 30% for non-corporate promoters. This measure is designed to prevent tax arbitrage and ensure that large shareholders do not exploit the system.

The concept of share buybacks allows companies to repurchase their own shares from existing shareholders, effectively reducing the number of outstanding shares in the market. This can lead to better valuation and an increase in earnings per share (EPS), making it an attractive option for companies looking to return capital to their shareholders.

Experts believe that this change will restore the viability of share buybacks as a tax-efficient method for companies to distribute capital, alongside dividends. Manvinder Singh, a legal expert, highlighted that this amendment corrects an anomaly introduced in October 2024, providing much-needed fairness to the taxation of buybacks.

Riaz Thingna from Grant Thornton Bharat emphasized that this tax reform is a step in the right direction, benefiting many minority shareholders who will now be taxed at a lower rate of 12.5%. However, it is important to note that the wealthier promoters will continue to face higher tax rates.

While the proposed changes are seen as positive for retail and non-promoter shareholders, there are potential challenges ahead. Legal experts caution that disputes might arise over offsetting capital losses against buyback proceeds, which could complicate the tax landscape further. Overall, the Budget 2026-27 presents a significant shift in the way share buybacks are taxed, aiming to create a more equitable environment for investors in India.