Tax Planning After the 2026 Buyback Changes

Introduction : Corporate share buybacks have become one of the most scrutinized tools of tax policy in India, and the Finance Act, 2026 marks the third significant change in their taxation since 2019. Under Section 115QA, buybacks were taxed at a flat rate for the company and this income is tax-exempt for the shareholders. The Finance Act, 2024 has abolished this company - level levy and treated the whole buyback proceeds as deemed dividend in the hands of the shareholders. This was commercially disruptive as buybacks collapsed as promoters and institutional shareholders ended up paying tax for the entire buyback proceeds rather than on the actual economic gain from it.

The Finance Act, 2026, effective from 1st April 2026, has started yet another reversal. Under the new framework, the consideration received by shareholders on a buyback of shares is taxed as capital gains which is defined as the difference between buyback price and the cost of acquisition of shares for the shareholders. In addition, there is an extra layer of tax for the promoters. For founders planning an exit, private equity investors structuring a portfolio company's capital return, and listed companies weighing buybacks against dividends, the practical tax and timing calculus has changed once again. This blog sets out the new framework, its differential impact across stakeholder categories, the structuring choices now available, and a planning checklist for the year ahead.

Framework for Law and Regulation

A. Buyback Proceeds as Deemed Dividend under the 2024 Regime

The introduction of the scheme in terms of the Finance Act, 2024, which came into effect on 1 October 2024, provided that, if you have received some funds through a share buyback scheme, the whole amount will be treated as a dividend and considered as part of your income, subject to tax according to your relevant slab rate (which could be as high as around 42.7 per cent for higher income earners, not including surcharge and cess). You could not claim deduction for the cost you paid for buying the shares. The amount would be considered to have incurred capital loss instead. Corporations were required to deduct taxes on the buyback amounts before paying the shareholders - tax deducted at source from resident shareholders (above a certain limit threshold) of 10 per cent and 20 per cent for those who are non-resident. Therefore, in short, the entire amount of one’s cheque will be taxed instead of only profits from it, making buybacks a far more costly process for the shareholders.

B. The New (2026) Rule: Taxed as a Capital Gain

From 1 April 2026, this changes. The money received in a buyback will no longer be considered a dividend. Rather, it shall be treated as a capital gain - you would be taxed only on the net profit (buyback price less what you had paid to buy shares) as in effecting a sale of shares on the stock market. If shares have been held for more than 12 months, the long-term capital gains tax is 12.5%, with the first ₹1.25 lakh of profit in a particular year being tax-free meaning in the case of holding the shares for 12 months or less, short-term capital gains would be taxable at 20%. These changes would be applicable in respect of all buybacks occurring on or after 1 April 2026; anything done before that date would continue to be taxed as per the previous dividend rule of 2024.

C. The Promoter Additional Tax

The 2026 amendments impose an extra tax, which will come into effect for individuals defined as promoters, either alone or as a group, as per the SEBI regulations, 2018. For instance, this extra tax will mean that the effective tax rate applicable on promoter’s buyback profit will be about 22% for a domestic company as well as approximately 30% in case of individuals or any other entity which is not a corporation and which is more or less likely to hold shares for a long term. The SEBI definition of the promoter has drawn criticism as it might include founders who have very little if any influence in respect of a buyback decision.

Impact Analysis: Founders, PE Investors and Listed Companies

A. Founders and Promoter Shareholders

For many founders, this development should be a welcome occurrence, as they will now only incur taxes based on the profit you actually make, rather than on the overall amount. However, should the buyback occur when you are still classified as a promoter, you will be liable for taxes at the higher rate, 22 percent or 30 percent, as opposed to the lower general rate, which is either 12.5 percent or 20 percent. Given this, it pays to look into your current status to see if you have ceased to be classified as a promoter before the buyback so that you do not incur the taxes at the higher rate.

B. Private Equity and Institutional Investors

Private equity and institutional shareholders who are not classified as promoters benefit most directly from the reform. Investors are now subject to the same capital gains tax regime on the proceeds as they would have been on ordinary sales of shares under old law i.e. the capital gains are calculated on the difference between the exit price and the cost of acquisition in a buyback. PE funds acquiring shares through the FVCI, FPI or AIF models must update their approaches to exit clauses in shareholders’ agreements as the dynamics of buyback versus market transaction versus structured secondary sales has changed once again.

C. Listed Companies

The tax changes for listed companies bring back buybacks as an option — many companies had avoided buybacks in the 2024-2026 period because of the heavy tax burden. Once again, buybacks have become an option along with dividends for cash return to owners or improvement of earnings per share without surrendering control. Most benefits accrue to regular shareholders as they now pay only on their profits. In case your company is promoted by a large stakeholder, it is advisable to analyze the numbers before making any decisions regarding the size and the price of buybacks as this will determine how much tax the promoters are liable to pay and thus how valuable the buybacks will be for them or in other words, if the buybacks make sense for promoters.

How the Tax Is Calculated, and When Timing Matters

A. Working Out the Tax

The math is simple: take the amount that you received per share when the company repurchased, deduct what you had originally invested in that share, and the difference will represent your taxable profit. Unlike previously, now you do not have to compute dividends and you do not have to consider the original cost of your shares as a loss since it is already accounted for in your calculation. If you had purchased shares at various times and prices (say, through ESOPs or in multiple funding rounds), maintain the records of your investment and date of purchase for every batch, as this will define the applicable tax rate and whether the SER is applicable for that batch.

B. Time-Related Issues

Repurchase offers and the purchase date of shares come into play when the new law comes into effect. To turn a short-term debt of 20% into a long-term debt of 12.5% (subject to the promoter surcharge where applicable, which does not distinguish by holding period), stockholders nearing the twelve-month threshold may postpone their sale of shares until they are declared long-term investors. Companies planning a buyback should also know that repurchases executed before 1 April 2026 will follow the conventional dividend policy rules, while repurchases occurring after this date will be subject to taxation based on capital gains rules, thus making the record date and payment date ever more important for transactions crossing the transition date.

C. Structuring Options

The recent regulations have given rise to several structuring alternatives. Firstly, firms must look at the impact of the payout of dividends or buybacks from a shareholder point of view. Non-promoters as well as individual shareholders will find that the buyback procedure is more profitable than dividends owing to chances of lower taxes through buybacks. For promoters, the buyback does provide certain tax benefits but these are less than those enjoyed in the dividend payout situation. Next, it is advisable for promoters looking at a buyback to consider whether there are ways to restructure such that they retain their tax position. The founders and the promoter entity need to analyze if pre-buyback restructuring methods, such as routing the exit via a holding company, placing shares in other hands much before the record date or timing the buyback along with other liquidity events, will affect the tax status of the entity.

In addition, it is important for private equity (PE) investors to clearly identify in their transaction documentation during negotiations how exit will take place, whether through buyback, open-market sale or negotiated secondary sale, because the practices with respect to taxation and transfer of shares differ depending on the structure. Finally, irrespective of the tax implications, the company should ensure that the tax-incorporated company-law requirements for a buyback under Section 68 of the Companies Act, 2013 are satisfied, including the 25 per cent paid-up capital and free reserves ceiling, the debt-equity ratio condition, and cancellation of bought-back shares within the prescribed period - independently of the tax analysis.

When a Buyback Still Makes Sense

In a number of situations, repurchase schemes can remain effective even if a tax is imposed on the sponsors. This is owing to the fact that, when a firm possesses a considerable number of liquid resources but is not obliged to pay them out temporarily, the purchase of shares becomes a valid means of transferring the additional funds to shareholders while increasing earnings per share and not promising to distribute dividends afterwards. In addition, repurchase arrangements can be even more profitable from the taxation standpoint if the majority of investors are not sponsors. Furthermore, repurchases can help in the seamless exit of certain individuals, for example, in the case if the company’s co-founder is departing or if the private equity fund wants to get rid of its investments. Finally, even if the sponsors do not sell their stocks as part of the repurchase plan, they still have some benefits from the repurchase plan without bearing any tax burden associated with their shares. However, in the case of active involvement of the sponsors in the repurchase process, companies can use alternative strategies, for instance, a smaller repurchase and dividend payment.

Relevant Case Laws

A. Genpact India Pvt. Ltd. v. DCIT

Genpact India bought back shares from its Mauritius-based holding company and argued that the special buyback tax under Section 115QA did not apply, because the buyback had been carried out through a court-approved scheme of arrangement rather than the specific buyback procedure under company law. The dispute reached the Delhi High Court and then the Supreme Court, mainly on the question of whether such a demand could even be appealed. The broader point for founders and companies today is the same: routing a buyback through a different legal mechanism does not automatically take it outside the special tax rules aimed at buybacks, and the specific procedure used can itself become a point of dispute with the tax department.

B. Cognizant Technology Solutions India Pvt. Ltd. v. ACIT

In a widely discussed 2023 ruling, the Chennai Income Tax Appellate Tribunal held that Cognizant's roughly ₹19,000 crore buyback - carried out through a High Court-approved scheme of arrangement rather than the standard buyback process - was a ‘colourable device’ with no real commercial purpose beyond avoiding tax, and taxed it as a dividend rather than as capital gains. The company had treated the payout as capital gains, which would have been tax-free for its Mauritius shareholder under the India-Mauritius tax treaty; the tax department disagreed and prevailed before the Tribunal. Cognizant has since challenged the ruling before the Madras High Court. The Supreme Court has so far only upheld interim orders directing partial payment pending that appeal - it has not yet ruled on the underlying question of whether the buyback was genuinely a colourable device, and the substantive appeal remains pending as of 2026. Even so, the case is a reminder that even under the new 2026 capital-gains-friendly rules, a buyback structured mainly to get a better tax outcome, with little genuine business reason behind it, remains vulnerable to being recharacterised by the tax authorities.

What Companies and Advisors Should Do Now

The In-house legal and finance departments should revise their capital return documents; outdated FAQs and shareholder communications pertaining to the 2024 dividend-tax regulations which are no longer relevant. In addition to the standard Section 68 compliance checks, boards authorizing a buyback should request a detailed breakdown of the amount tax promoters will pay under the new surcharge. In order to ensure that shareholder agreements, ESOP contracts, and exit plans reflect the new capital-gains-based laws rather than the outdated dividend-style ones, advisors working with founders and PE clients should review these documents. And because this is already the third change to buyback tax rules since 2019, it is worth adding flexible language to new agreements so parties can adjust their plans if the rules change again.

Conclusion

The Finance Act of 2026 brings back a base for taxing share buybacks on more sensible economic grounds by charging tax based on actual profits instead of gross proceeds while still providing a specific anti-avoidance mechanism in the form of an extra tax on promoters. For founders, the outcome matters mainly on the promoter status; for private equity investors of firms that are not in the promoters group, share buybacks will again be quite tax-efficient as they used to be before 2024; and for public companies, buybacks are once again a possible way of distributing excess capital. In light of the fact that the fundamental rules have been changing so often (in 2019, then 2024, and now 2026), it is important to ensure that the tax planning methods regarding buybacks are flexible while tracking the holding period, controlling the promoter status, and making sure there are accurate records of the cost basis of the investments.

Author: Baisakhi Das in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Planning checklist

1. Verify the date: if the buyback happens prior to 1 April 2026, it is governed by the old dividends rule; if it occurs on or after that date, it will be governed by the new rules on capital gains.

2. Ascertain whether any shareholders qualify as ‘promoters’ as per SEBI’s rules, as that will determine if the extra tax should apply to them (22% to 30%).

3. Ascertain how long each share group (including ESOP shares and bonus shares) has been in existence as that will help determine how much tax is payable.

4. Maintain records of the price paid for each group of shares so the exact profit of each buyback can be calculated.

5. Before making the decision on the best structure, compare the after-tax position of a buyback against a dividend and a direct sale of the shares for each type of shareholder.

6. If you are a close-founder party to the promoter threshold, ascertain in advance if the shares you own do qualify you as a promoter.

7. Update private equity shareholder agreements and exit agreements drafted under the old 2024 rules to reflect the current buyback taxation policies.

8. Separately confirm the company-law requirements for a valid buyback under Section 68 of the Companies Act, 2013 — this is a different checklist from the tax one.

9. Plan for tax to be deducted at source (10 per cent for residents, 20 per cent for non-residents) and set aside cash for this in advance.

10. Remember that surcharge and cess add to the headline tax rates, especially for high-net-worth promoters.

11. Add flexible language to agreements so plans can be adjusted if the rules change again — they have already changed three times since 2019.

Endnotes / References

1. Finance Act, 2026, amendments to the Income-tax Act, 2025 (India) — capital gains treatment of buyback consideration, effective 1 April 2026.

2. Income-tax Act, 2025, s. 69 (India) — taxation of buyback consideration as capital gains; omission of the deemed dividend characterisation for buybacks.

3. Finance Act, 2024 (India) — deemed dividend treatment of buyback proceeds, effective 1 October 2024 (superseded from 1 April 2026).

4. Companies Act, 2013, s. 68 (India) — conditions for a valid buyback of shares, including funding limits and cancellation requirements.

5. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 — definition of ‘promoter’ and ‘promoter group’.

6. Union Budget 2026–27, Memorandum explaining the provisions of the Finance Bill, 2026 (India) — buyback taxation and promoter additional tax.

7. Vinod Kothari Consultants, ‘From Bye Backs to Buy Backs: How New Taxation Rules Impact Equity Extraction’ (2026).

8. Vinod Kothari Consultants, ‘Buyback Taxation Rationalised with Limited Relief to Promoter Shareholders’ (2026).

9. Alvarez & Marsal, ‘Budget 2026-27: Why Buyback Taxation is a Victory for Minority Shareholders and a Hurdle for Promoters’ (2026).

10. KPMG, ‘India: Finance Bill, 2026 Passed by Lower House of Parliament with Direct Tax Amendments’ (27 March 2026).

11. Genpact India Pvt. Ltd. v. Deputy Commissioner of Income Tax, Civil Appeal No. 8945 of 2019 (Supreme Court of India).

12. Cognizant Technology Solutions India Pvt. Ltd. v. ACIT, [2023] 154 taxmann.com 309 (Chennai ITAT); interim orders in Cognizant Technology Solutions India Pvt. Ltd. v. ACIT, 2024 SCC OnLine SC 44 (Supreme Court, appeal on merits pending before the Madras High Court as of 2026).