The Finance Bill, 2026, which was passed by the Lok Sabha on Wednesday, has proposed a flat 12% surcharge on income from share buybacks, resulting in a higher effective tax rate for those with up to Rs 1 crore taxable income.
The Bill seeks to overhaul buyback taxation by shifting the tax burden to shareholders and treating proceeds as capital gains under Section 69 of the Income-tax Act, 2025. But it is the move towards a uniform surcharge—irrespective of income slabs—that is drawing the most attention.
Under the current framework, surcharge on capital gains is linked to income levels of individuals, with no surcharge up to Rs 50 lakh and 10% between Rs 50 lakh and Rs 1 crore. The proposed flat 12% levy would override this structure, leading to a higher effective tax rate for a wide base of individual shareholders.
“Moving to a flat 12% surcharge means higher tax outgo across lower and mid-income brackets, making buybacks a costlier route compared to dividends,” said Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Global Advisors.
The impact, however, is not uniform. For large buybacks where gains exceed ₹1 crore — currently attracting a 15% surcharge — the proposal effectively reduces the levy by 3 percentage points.
The uniform surcharge is also expected to increase the tax burden for certain corporate shareholders. At present, no surcharge applies for taxable income up to Rs 1 crore, while a 7% surcharge applies between ₹1 crore and ₹10 crore. The shift to 12% would raise costs in both cases, potentially making buybacks less attractive.
Experts say the change could alter corporate capital allocation decisions, with companies possibly favouring dividends over buybacks as a means of returning cash to shareholders.
Amit Maheshwari, Managing Partner at AKM Global, noted that the draft amendment provides some clarity by indicating that surcharge on buyback income may be capped at 12%, addressing earlier ambiguity.
However, he cautioned that the position will only be certain once the Finance Bill is enacted. “Any definitive tax treatment should await the final legislative framework,” he said.
Separately, the government has proposed a clarification to ensure that the higher tax regime for promoters — 22% for promoter domestic companies and 30% for others — applies only to buybacks undertaken under Section 68 of the Companies Act, 2013.
This amendment, effective April 1, 2026, aims to prevent unintended tax exposure for transactions outside the formal buyback route.
