Budget 2026: Income Tax Dept clarifies on changes in ‘buyback tax’ (Tax Slabs)

In the 2026 Union Budget, Nirmala Sitharaman announced new Budget 2026 tax changes aimed at simplification of the tax code, protection of minority shareholders, and prevention of possible abuse of certain provisions. Changes to the share buyback taxprovisions received significant attention. 

To address investor concerns, the Income Tax Department clarified how the buyback tax changes will impact shareholders as well as the income tax slabs 2026.

This policy paper analyses Budget 2026 tax changes on buybacks, the Income Tax Department's position, buybacks vis-à-vis dividend tax India, income tax slabs 2026 status, and implications for investors and businesses.

What is Share Buyback and Why is Taxation on Share Buyback Important?

Share buyback is the process by which a company buys back its shares from its shareholders, resulting in a reduction of the company’s outstanding shares. It is viewed as a way to return cash to investors, and is a way to reduce the number of outstanding shares, increase EPS and ultimately, increase the share price. In India, buybacks have been a way for companies to return capital to shareholders, especially in the case of tech and promoter-driven firms.

Over the years, taxation on buybacks has changed. Until 2020, companies would incur a buyback tax, which was a tax similar to a dividend distribution tax. Starting 2020, however, the focus was on the shareholders. 

During Budget 2024, a significant change happened where buyback proceeds would now be treated as deemed dividends. This meant taxing shareholders at their slab rates, and the cost of shares was treated as a capital loss, which, in turn, could be offset against other capital gains.

This led to problems. Small shareholders typically ended up with a tax on the entire proceeds (30% or more) with no offset for losses if there was no capital gain. On the other hand, large shareholders and promoters would take advantage of this arbitrage situation. The Budget 2026 buyback taxchanges are meant to address this problem.

 

 

Main Changes to the Buyback Tax in Budget 2026

In what is perhaps one of the most significant changes, the Budget 2026 tax changes state that, from 1 April 2026 (subject to the Finance Bill being passed), all shareholders will be taxed on buyback proceeds as capital gains. This is one of the major changes as buybacks will now be treated far closer to regular sales of shares than dividends.

- Tax Calculation: Tax will be applicable only to the gain (Buyback Price - Cost of Acquisition).

Rate Description:  

Long-term capital gains (more than a year): 12.5%

Short-term capital gains (less than a year): 20%

This is generally more advantageous than slab-based taxation on dividends, more so for retail investors in the lower and middle brackets.  

Promoter-Specific Additional Tax: There is additional taxation to prevent abuse by the founders/promoters. For corporate promoters, the effective rate is 22%, and for non-corporate, it is 30%. This is aimed at tax arbitrage as promoters used buybacks to benefit at lower effective tax rates.

The change better protects minority shareholders by streamlining compliance and lowering tax burdens from the previous deemed dividend taxation.

Income Tax Department's Explanation of the Changes to Buyback Tax  

After the budget, the Income Tax Department offered clarifications to mitigate confusion. The Department focused primarily on the understanding that buybacks are much closer to capital gains than to dividends. 

The previous deemed dividend taxation created inequitable consequences for minority shareholders, as taxes were paid on cash received, while capital losses, if any, were left to remain unutilised even though they could offset other gains.  

Here are some important aspects of the clarifications:  

The previous benefits that small and retail shareholders received from only taxation of losses at the lower, preferential rates of capital gains tax are no more; this benefit will now accrue to larger shareholders.  

There is a greater tax burden on promoters to prevent abuse.  

The change promotes greater equity by addressing the previous inequities and streamlining taxation.

- There is no clear connection to the income tax slabs 2026 because the capital gains rates are not linked to the income tax slabs.

This helps ease the concerns of investors that the share buyback taxreform is more equitable and fair.

How Does This Compare to Dividend Tax in India?

Dividend tax India remains the same in Budget 2026. After Dividend Distribution Tax (DDT) was discontinued in 2020, dividends are taxed in the hands of the receiver in accordance with the income tax slab rates that are applicable to them (up to 30% plus surcharge and cess).

Previously (post-2024), buybacks under the old regime were treated the same way as dividends - the entire proceeds were taxed at slab rates. The buyback tax changes in Budget 2026 allow buybacks to become more tax-efficient for shareholders:

- Tax is applicable only on gains, not on the entire amount.

- Compared to slab rates, the rates (12.5-20%) are more favourable.

- No capital loss set-off complications.

For companies, buybacks may still be appealing, although promoters now incur higher costs, which may drive them to prefer dividends or reinvestment instead.

 

 

Income Tax Slabs 2026: No Important Changes

After the Budget, an important issue is whether the income tax slabs 2026 were updated. The answer is no. The slabs are the same for FY 2026-27 (AY 2027-28).

New Tax Regime (Default):

- Tax-free for up to ₹4 lakh

- ₹4–8 lakh = tax at 5%

- ₹8–12 lakh = tax at 10%

- ₹12–16 lakh = tax at 15%

- ₹16–20 lakh = tax at 20%

- ₹20–24 lakh = tax at 25%

- More than ₹24 lakh = tax at 30%

With a rebate under Section 87A, an individual with an income of up to ₹12 lakh pays zero tax. If you earn a salary, you will receive a standard deduction of ₹75,000.

Old Tax Regime:

- There is an age-based difference in the basic exemption limits ( ₹2.5 lakh for under 60, ₹3 lakh for senior, ₹5 lakh for super senior).

- There are tax slabs of 5% up to ₹5–10 lakh, and then 20% and 30%.

In the Budget 2026 tax update, there is an emphasis on simplification. The new tax laws (New Income Tax Act) will come into force in April 2026 and will have simpler forms and compliance.

Impact on Investors, Companies and the Market

For retail investors, the Budget 2026 buyback tax changes are mainly advantageous since tax is only on the gains and buybacks are more beneficial for long-term holders.

Promoters and large shareholders might become less efficient with the extra taxes associated with buybacks and so may decide to focus more on dividends, capex, or other returns.

Companies will have clearer regulations, which is expected to result in more responsible capital allocation. The market may see less arbitrage-driven buybacks and more stability for minority shareholders.

Other various Budget 2026 tax updates include:

- Higher STT levies on F&O trades.

- TCS on overseas tours and LRS has been cut meritoriously.

- Penalties and foreign asset disclosure scrapped.

 

 

Conclusion

The Budget 2026 buyback tax adjustments are a remedy and a revision to the most recent and previous iterations of buyback taxes with the most focus being placed on simplicity and correctness. It has been underscored by the Income Tax Dept. that, in the most practical ways, small shareholders are the most beneficiaries, while promoters are the most losers. Therefore, with no changes to the income tax slabs 2026, investors are free to plan.

The changes to the buyback tax and updates to the Budget 2026 tax update sare clearly signs of the government's dedication to fairness with taxes. A tax advisor can assist with these updates.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.