Buy-Back Taxation:
A Story of Constant Re-Engineering

Budget Analysis
FY 2026-27

The Union Budget 2026 marks yet another inflection point in the taxation of share buy-backs, underscoring the policy trend of continuous recalibration rather than stability.

To recap the journey:

Initially: Buy-back proceeds were exempt in the hands of shareholders, with tax incidence at the company level under section 115QA of the Income-tax Act, 1961.

Subsequently: The regime shifted to treating buy-backs as deemed dividend under section 2(40)(f) of the Income-tax Act, 2025, leading to taxation without recognising cost of acquisition.

Now (Budget 2026): Buy-back proceeds are proposed to be taxed as capital gains by omitting section 2(40)(f) and charging under the capital gains provisions (sections 69–74 of the Income-tax Act, 2025), restoring alignment with economic substance and global best practices.

From a policy lens, the move to capital gains taxation is a structural correction—it recognises holding period, acquisition cost under the capital gains head, and brings parity with other exit mechanisms.

Retail investors stand to benefit from lower and more rational tax outcomes at STCG/LTCG rates, unlike the prior slab-based full-amount taxation under section 2(40)(f).

However, the frequent shifts—from exemption under section 115QA, to dividend taxation under section 2(40)(f), and now to capital gains—highlight the need for long-term tax certainty, especially for capital allocation and corporate payout planning.

Going forward, clarity and consistency will be critical for companies and investors to make informed, forward-looking decisions