In a move aimed at protecting minority shareholders while curbing tax arbitrage by promoters, the Finance Minister has proposed a fresh overhaul of the taxation framework for share buybacks. Finance Minister Nirmala Sitharaman, in Parliament, said, “I propose to tax buyback for all types of shareholders as Capital Gains. However, to disincentivize misuse of tax arbitrage, promoters will pay an additional buyback tax. This will make effective tax 22 percent for corporate promoters. For noncorporate promoters the effective tax will be 30 percent”.
The proposal seeks to correct distortions that emerged after the 2024 amendment, under which buyback proceeds were taxed in the hands of shareholders, often at applicable slab rates, on the entire receipt, without allowing deduction for the cost of acquisition. This disproportionately impacted minority and retail investors, even though the policy intent was to check misuse of buybacks by promoters.
Under the new proposal, buyback proceeds will be taxed as capital gains for all shareholders, ensuring that tax is imposed only on the actual economic gain. This aligns the taxation of buybacks with that of regular share sales and removes the anomaly faced by non-promoter investors.
At the same time, to disincentivise promoters from using buybacks as a tax arbitrage tool, the government has proposed an additional buyback tax on promoter shareholders. As a result, the effective tax incidence on buybacks would rise to around 22 percent for corporate promoters and 30 percent for non-corporate promoters, according to the proposal.
Amit Maheshwari, Managing Partner, AKM Global, said, “In the interest of minority shareholders, the Finance Minister has now proposed to tax buyback proceeds as capital gains for all shareholders, ensuring that tax applies only to the real gain.” Maheshwari further added, “ To curb misuse through tax arbitrage, an additional buyback tax has been introduced for promoters, resulting in an effective tax rate of about 22 percent for corporate promoters and 30 percent for other than corporate promoters. This aligns buybacks with normal share sales for minority and retail interests while safeguarding revenue.”.
Tushar Sachde, Tax Partner at PwC India, said the earlier buyback tax regime was problematic as buybacks were taxed at the gross level like dividends, while the cost of shares was allowed only as a capital loss. “That meant shareholders might not always be able to set off the loss immediately and would have to carry it forward, resulting in an additional tax burden,” he said.
The proposed changes are expected to reduce promoter-led tax arbitrage through buybacks, make the mechanism more investor-friendly, and also safeguard government revenue.
How to understand the tweak for retail shareholders
As per tax experts, if a shareholder has purchased 1000 shares of a company at Rs 500 per share and the company announces the buyback at 700 per share, and if 800 shares are accepted in tender then shareholder will receive Rs 700x800= Rs 5,60,000. The cost of the acquisition of the share is Rs 500x800=Rs 4,00,000. Now the investor will be taxed on the Rs 1,60,000 based on holding period, LTCG or STCG will apply. Which means the tax will be applicable on the actual gain not the entire buyback amount received. Investors usually don’t tender at lower prices but in case someone tenders at less than acquisition price then capital loss set off will be allowed.
Currently, the entire buyback income is treated as deemed dividend in the hand of shareholder and taxed at applicable tax slab. Additionally, companies also deduct TDS at 10 percent for resident shareholders and non-residents face 20 percent TDS.
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