NEW DELHI: In Union Budget 2026-27, the government reversed its buyback tax framework, which had treated buyback receipts as deemed dividend income in the hands of shareholders without allowing any deduction for acquisition cost. Finance minister Nirmala Sitharaman announced that proceeds from buybacks will now be taxed as capital gains.
“The change in taxation of buybacks was brought in to address the improper use of the buyback route by promoters. In the interest of minority shareholders, the government will now tax buybacks for all types of shareholders as capital gains,” Sitharaman said.
However, to curb potential tax arbitrage by large shareholders, a new Promoter Buyback Tax has been introduced. Under the revised regime, corporate promoters will be taxed at an effective rate of 25%, while non-corporate promoters will be subject to a 33% levy.
“This is a welcome move because under the current regime, investors pay tax on the entire buyback proceeds as ‘dividend income’ and then have to claim a capital loss equal to the cost of acquisition of the shares bought back. The existing framework resulted in a higher burden, particularly for long-term shareholders and HNIs,” said Rajesh H Gandhi, Partner, Deloitte India. The change is expected to make buybacks more attractive, especially as dividends continue to be taxed at slab rates.
Earlier buybacks were taxed as dividends, while the extinguishment of shares was treated as a capital loss. This created difficulties for small shareholders, who often lacked capital gains against which the loss could be set off.
At the same time, the Budget proposed higher taxes on the futures and options (F&O) market. The minister announced an increase in Securities Transaction Tax (STT) on futures to 0.05% from 0.02%, and on options to 0.15% from 0.10%. The changes are expected to impact high-frequency traders and wealthy investors who dominate India’s derivatives market.
“To provide a reasonable course correction in the F&O segment of the capital market and generate additional revenue for the government, it is proposed to raise the STT on futures to 0.05% from the present 0.02%,” the FM said.
During the post-Budget media briefing, finance ministry officials said the move was aimed at discouraging excessive speculation in F&O trading.
The measures come amid growing regulatory concern over derivatives speculation. A Sebi study revealed that 93% of individual traders incurred losses in equity F&O between FY22 and FY24, with aggregate losses exceeding `1.8 lakh crore over three years.
Higher transaction costs, reduced profitability
The immediate impact of the STT hike will be higher transaction costs for traders and reduced profitability for active F&O participants, said K C Jacob, Partner, Economic Laws Practice.
