The Union Budget 2026 has introduced key amendments to the tax structure applicable on share buybacks. Under the earlier system, the money received by retail investors through open market share buybacks was treated as dividend income. As a result, the earnings from these transactions were taxed according to the investor’s individual income tax slab, often leading to higher tax liabilities for investors falling in higher tax brackets.

Revised tax treatment aims at simplification

In the proposed policy change, the government intends to revise how income from share buybacks is taxed, particularly for retail investors. Instead of taxing the distributed amount in the hands of shareholders as dividend income, the new mechanism suggests levying a buyback tax at the company level. This measure aligns with the government’s objective of simplifying tax administration and offering a more uniform tax treatment for various investment instruments.

Current scenario caused higher tax outgo for many

Previously, retail investors participating in share buybacks had to include the amount received as part of their total income. Since it was considered dividend income, it was taxed based on the investor’s applicable income tax slab. This structure was often disadvantageous for those in the 30 percent bracket, as it substantially reduced their post-tax earnings from share buybacks. The new rules seek to address this concern by eliminating the slab-based taxation model for these transactions.

Buyback tax to be shifted to the company

Under the proposed amendment, the obligation to pay tax on buyback proceeds will rest with the company executing the buyback, rather than the investors. The idea is to simplify tax compliance for shareholders and ensure a more predictable tax outcome. The change is expected to align with existing practices applied to listed companies under earlier amendments, where companies conducting buybacks through the open market were subject to a flat tax rate on distributed profits.

Impact on retail investor participation

The revised taxation framework for share buybacks is likely to make participation more attractive for retail investors. By removing the requirement to pay tax according to their respective income brackets, investors may end up retaining a larger portion of the gains from such corporate actions. It also reduces administrative burdens for individual taxpayers, who previously had to account for the income while filing returns under multiple heads.

Implementation following legislative approval

The proposed modifications will take effect once passed by Parliament and enacted into law. Detailed guidelines and exact tax rates applicable at the company level are expected to be notified in the coming months after the Finance Bill is ratified. Investors and market participants will need to monitor further announcements for clarity on procedural aspects and reporting requirements under the new system.