RECENT CHANGE IN BUYBACK TAXATION-HIGHER TAXATION OF SHARE BUYBACKS FROM “DIVIDEND INCOME” TO “CAPITAL GAINS.”
WHAT IS NEW ?
In Union Budget 2026,
India has shifted the taxation of share buybacks from “dividend income” to
“capital gains.” For promoters, this means a higher levy: corporate promoters
face an effective tax rate of 22%, while non-corporate promoters (individuals,
trusts, etc.) face 30%. This change aims to curb tax arbitrage and protect
minority shareholders.
KEY CHANGES IN BUYBACK
TAXATION (BUDGET 2026)
OLD REGIME (PRE-2026):
• Buyback proceeds were treated as dividend
income.
• Companies paid a buyback distribution tax
(BBT), while shareholders were exempt.
• Promoters often used buybacks to avoid
higher dividend taxation.
NEW REGIME (2026
ONWARDS):
• All shareholders: Buyback proceeds are taxed
as capital gains.
• Promoters: Additional levy introduced to
discourage tax arbitrage.
• Corporate promoters (domestic companies):
Effective tax rate 22%.
• Non-corporate promoters (individuals, HUFs,
trusts, foreign entities): Effective tax rate 30%.
IMPLICATIONS FOR
PROMOTERS
• HIGHER TAX BURDEN:
Promoters now directly
bear capital gains tax, unlike the earlier system where companies absorbed the
buyback tax.
• REDUCED ARBITRAGE:
The government aims to close loopholes where
promoters preferred buybacks over dividends to minimize tax.
• STRATEGIC SHIFT:
Promoters may
reconsider capital allocation strategies, balancing dividends vs. buybacks.
• MINORITY SHAREHOLDER PROTECTION:
Ensures fairer treatment, aligning buyback proceeds with capital gains taxation.
SPECIAL DIVIDEND BY PROCTOR
& GAMBLE
Proctor & Gamble
announced a special dividend of Rs 25 out of total dividend of Rs 195 mainly to
avoid share buyback and pay higher taxes.
HOW WILL IT HELP THE
CORPORATES ?
·
It is not part of the regular dividend
policy
·
It should not be annualised or
extrapolated
·
It helps return cash without
committing to higher future payouts
KEY TAKEAWAY
Promoters in India now
face direct capital gains taxation on buybacks, with 22% for corporates and 30%
for non-corporates, marking a decisive policy shift to discourage tax arbitrage
and protect minority investors
R V SECKAR FCS, LLB
79047 19295
