Budget 2026 in Focus: Why India’s New Share Buyback Tax Design Faces Growing Criticism
New Delhi: The Finance Act, 2024 significantly altered the tax treatment of share buybacks in India, shifting the tax burden from companies to shareholders with effect from October 1, 2024. While the change was positioned as a simplification, it has instead sparked widespread concern among tax experts, industry bodies and investors, who argue that the new framework creates distortions and departs from global norms.
Under the earlier regime, listed companies paid buyback tax under Section 115QA, and shareholders received the proceeds tax-free. The revised framework scrapped this approach and introduced a two-part mechanism. The entire buyback consideration is now treated as deemed dividend in the hands of shareholders, taxed at slab rates that can go up to 35.88 per cent for high-income individuals. Simultaneously, the original cost of acquisition of the shares is treated as a capital loss, adjustable only against capital gains in the same or subsequent years.
In 2025, several listed companies including Infosys, Bajaj Consumer Care, Tracxn Technologies, SIS, Infobeans Technologies and Dhampur Sugar Mills opted for buybacks under the new rules, bringing real-world impact into sharper focus. Experts point out that shareholders are effectively taxed upfront at higher rates, while relief through capital loss set-off is deferred and subject to conditions such as timely filing of returns and availability of future capital gains.
Critics argue that the framework taxes capital receipts as income, even in cases where buybacks are funded through share premium or fresh issue proceeds rather than accumulated profits. In such situations, there is no actual distribution of profits, yet the entire payout is taxed as dividend, potentially leading to taxation even when shareholders suffer economic losses.
Internationally, jurisdictions such as Australia and the UK tax buybacks as dividends only to the extent of the income component embedded in the buyback price, offering a more balanced approach. Indian tax experts have suggested revisiting the design in Budget 2026 by restoring capital gains treatment under Section 46A, exempting buybacks funded through capital sources, and splitting taxation where buybacks are funded out of retained earnings.
As discussions around Budget 2026 intensify, investors and advisors are calling for reforms to align taxation with economic substance and reduce unintended hardship
Our Final Thoughts
The overhaul of share buyback taxation was meant to streamline compliance, but its execution has created fresh challenges for investors. By taxing the entire buyback amount as dividend while deferring relief through capital loss adjustments, the system risks penalising shareholders disproportionately. As more companies continue to use buybacks as a capital allocation tool, the anomalies in the current framework are becoming harder to ignore. Budget 2026 offers an opportunity to recalibrate the policy, align it with global practices and ensure that taxation reflects economic reality rather than form.