Under the current provisions for buyback taxation, any consideration received by a shareholder upon tendering the shares for buyback is treated as dividend income, which is taxable at applicable rates. The cost of acquisition of shares extinguished on buyback is allowed as a capital loss. The buyback taxation creates an opportunity for artificial tax outcomes in the hands of influential shareholders/ promoters by allowing them to time the events and generate capital loss, while in receipt of the consideration.
The Finance Bill, 2026 has proposed a regime shift for buyback taxation from treatment similar to dividend taxation, to treatment as capital gains, effective from 1st April 2026. Consequently, the specific higher tax rates have been prescribed for promoters participating in the buyback, thereby nullifying the possibility of timing the events for buyback.
Following table captures the rate of taxes for resident shareholders (excluding surcharge/ cess):
Particulars | Promoters | Public | ||||||
Promoters (Domestic Company) | Promoters (other than Domestic Company) | STCG (Unlisted) | ||||||
LTCG (Listed / Unlisted) | STCG (Listed) | LTCG (Listed / Unlisted) | STCG (Listed) | LTCG (Listed / Unlisted) | STCG (Listed) | STCG (Unlisted) | ||
Capital gains tax rates | 12.5% | 20% | 12.5% | 20% | As per slab rates | 12.5% | 20% | As per slab rates |
Additional capital gains rates | 9.5% | 2% | 17.5% | 10% | Nil | Nil | ||
Effective capital gains tax | 22% | 22% | 30% | 30% | 12.5% | 20% | ||
For the purposes of buyback taxation, while reference to promoter with respect to listed company has been made to SEBI regulations, for the unlisted company, reference has been made to the definition provided in the Companies Act, 2013 and also includes any person holding directly or indirectly more than 10% stake.
The word ‘directly or indirectly’ has not been defined, thereby providing scope for various interpretations around it. This opens up possibility of litigation in interpretation for the classification of a shareholder of an unlisted company for imposition of tax rate on buyback.
For the foreign shareholders, while tax treaty benefit would be available, it would be imperative to evaluate the implication country by country. For some jurisdiction, grand fathering may be possible and thereby treaty benefit would be possible to take. For jurisdiction where source based taxation is provided for capital gain treatment, foreign shareholders would be liable for even higher taxation, thereby making buy back route as tax expensive.
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