On a buyback record date, shareholders whose names are on the register see a tender offer from the company, and the cash they receive is taxed as capital gains from 1 April 2026. From 1 April 2026, the buyback tax for shareholders is calculated as a capital gain on the shares that are tendered.
Earlier, the company paid a tax on the buyback, and the shareholders received the money without any further tax in their hands. Now the position has been reversed again, and the capital gains treatment has returned.
Investors who expected the usual capital gains treatment will find it applies to buybacks from 1 April 2026.
How the payout is taxed
Long term gains on listed shares are taxed at 12.5% above Rs 1.25 lakh a year, and short term gains on listed shares at 20%.
Alongside this, the cost at which the tendered shares were bought is deducted from the amount received.
What investors and companies are doing
Some shareholders now regard buybacks as less attractive than they were earlier, and many are comparing the offer price with the tax they will have to pay on the full amount received. Investors in the higher tax slabs are feeling the change most, as the payout will be added to their income and taxed at the highest rate applicable to them.
Companies are also reconsidering their approach. Boards that had used buybacks to return surplus cash are now weighing them against A dividend is a part of a company's profit that the board decides to pay to shareholders, usually in cash, in proportion to the shares held. Read the full meaning of Dividend, since the tax in the hands of the shareholder is similar in both the cases.
It will be worth watching how companies choose between buybacks and dividends in the coming months.
