The income tax treatment for share buybacks has undergone a significant transformation effective April 1, 2026. According to reports from Live Mint, the tax liability for share buybacks announced on or after this date has shifted from a dividend-based model to a capital gains model for individual taxpayers. As reported by Pankaj Mathpal, CEO & MD at Optima Money Managers, the difference between the buyback price and the cost of acquisition will be taxable as Short-term Capital Gains (STCG) or Long-term Capital Gains (LTCG), depending on the holding period of the shares. This restoration of the cost-deduction principle means shareholders are now taxed only on actual gains, making buybacks attractive again after years of being treated as tax-efficient compliance exercises.
The current tax framework represents a departure from earlier regulations. As reported by SEBI-registered tax and investment expert Jitendra Solanki to Live Mint, before April 1, 2024, companies were required to pay 20% tax on the amount utilised for share buybacks, while the net proceeds received by shareholders were exempt under Section 10 of the Income Tax Act. However, for the period from April 1, 2024 to March 31, 2025, any money received by shareholders from companies under share buybacks was treated as a deemed dividend, taxable at the individual's slab rate. The previous regime created a uniform tax burden across all shareholders, regardless of their cost basis or holding period.
The new income tax rule 2026 proposes a capital gains model for benefits received from share buybacks, as explained by Jitendra Solanki to Live Mint. Under this framework, STCG will apply if the buyback is announced within one year of shareholding, with the period considered from the date of buying the stock to the buyback record date. For holdings exceeding one year, LTCG will be applicable based on the time difference between the date of buying and the buyback record date. For listed shares, the one-year LTCG rule applies, while for unlisted shares, the holding period for LTCG is 24 months with a 20% rate including indexation benefits. The new regime allows for cost-basis analysis, meaning shareholders can deduct their actual acquisition cost from the buyback proceeds, resulting in taxable gains only on the actual profit realized.
The revised ITR forms for AY 2025-26 introduce significant changes in buyback reporting procedures. From October 1, 2024, proceeds from buybacks by domestic listed companies are treated as deemed dividends in shareholders' hands, as reported by the Central Board of Direct Taxes (CBDT). Taxpayers must report the buyback amount under 'Income from Other Sources' and show zero sale consideration under capital gains. The resulting capital loss can be carried forward and set off against future gains. Importantly, from October 1, 2024, capital losses on share buybacks can be claimed only if the corresponding dividend income has been disclosed under the head 'Income from Other Sources'. This corrects earlier inconsistencies and brings uniformity in taxation, ensuring that capital losses are properly offset against the corresponding deemed dividend income.
