Union Budget 2026 makes share buybacks fair for retail investors

February 7, 2026 Finance Talk Valli Sarvani

The Union Budget 2026 introduces a significant reform aimed at improving tax fairness for retail investors.

The proposal focuses on correcting the unequal tax treatment of share buybacks, which earlier placed small shareholders at a clear disadvantage compared to promoters and institutional investors.

Under the existing tax regime, amounts received by retail investors in share buybacks were treated as dividend income.

As a result, the entire buyback consideration was taxed at the investor’s applicable income tax slab. This approach often led to a high tax burden, especially for investors in higher tax brackets, even though buybacks are economically similar to selling shares in the open market.

For instance, if an investor purchased shares for ₹1,000 and tendered them in a buyback at ₹1,800, the full ₹1,800 was taxed as dividend income.

At a 30% tax slab, including cess, the tax liability exceeded ₹560. This sharply reduced net returns and made buybacks tax-inefficient for retail investors.

In contrast, promoters participating in buybacks were taxed only on capital gains. They paid tax only on the profit portion of ₹800, with effective rates ranging between 22% and 30% plus cess.

Consequently, promoters consistently received higher post-tax returns from the same transaction. Although retail investors could later claim capital loss benefits, the process remained complex and did not fully offset the disadvantage.

The Budget 2026 proposal seeks to address this imbalance. It proposes taxing buyback proceeds for retail investors as capital gains rather than dividend income.

This means only the gain component will be taxable, aligning buyback taxation with normal market sales. More importantly, it establishes parity between different categories of shareholders.

If implemented, the change will significantly reduce the tax burden on retail investors. It will also make buybacks as tax-efficient as selling shares through the stock market.

Additionally, the reform is expected to encourage greater retail participation in corporate buyback programmes and improve overall investor confidence.

Buybacks are a common method for companies to return surplus cash to shareholders. The earlier tax structure discouraged retail participation and distorted investment decisions.

Budget 2026 signals a move towards fair, neutral, and investor-friendly taxation, marking a positive step for India’s equity markets.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on March 16, 2017