India's Budget 2026-27: Share Buyback Taxation Changes Spark Market Unease

SYNOPSIS: Budget 2026-27 reshaped share buyback taxation, sparking market unease. The article explains how buybacks work, why promoters use them, investor pros and risks, and what the new capital gains regime means. As soon as the Union Budget 2026-27 was presented on Sunday, 1st February, by Finance Minister Nirmala Sitharaman – her 9th budget and the 88th Union Budget since Independence – the mood in the markets turned cautious. Stocks began to slip, and many investors were left disappointed. Why? Because the Budget didn’t quite align with the expectations of the middle-class people or retail investors. For market participants, the most immediate concern was the hike in Securities Transaction Tax (STT). But that wasn’t the only surprise. Another term that suddenly grabbed attention and raised eyebrows was “share buyback.” The Finance Minister announced a change in the taxation of buybacks, stating that the move was aimed at curbing the misuse of buybacks by promoters. So, what exactly is a buyback? How does it work? And why did this announcement trigger such a strong reaction in the markets? Let’s answer all your questions in this article. A share buyback is when a company repurchases its own shares from existing shareholders. By doing so, the total number of outstanding shares available in the market comes down. This often helps improve the value of remaining shares, can support the stock price, and gives shareholders an opportunity to exit at an attractive price. To encourage participation, companies usually announce buybacks at a price higher than the prevailing market price. To understand this better, let’s take a simple example. Suppose a company’s share is trading at Rs. 1,500 in the market. The company then announces a buyback at Rs. 2,000 per share through the tender route. As a shareholder, you can apply to sell your shares at Rs. 2,000. The company will accept shares based on a proportional allotment, and once accepted, the buyback amount is credited directly to the shareholder. Together, these methods define how companies return excess capital to shareholders, but changes in taxation can significantly affect how attractive buybacks remain for investors. Companies don’t announce buybacks out of blue; there’s usually a clear strategy behind the decision. While the reasons can vary from case to case, these are some of the most common reasons: In short, share buybacks are often a capital-allocation decision – meant to balance shareholder returns, financial efficiency, and long-term confidence in the business. The Finance Minister announced significant changes in how share buybacks are taxed. The stated “objective”? To curb what the government sees as the misuse of the buyback route by promoters. Until now, buyback proceeds were treated like dividend income, meaning shareholders paid tax on the full buyback amount based on their income slab – sometimes as high as 30 percent. Under Budget 2026-27, buyback proceeds will now be taxed as “capital gains” for all shareholders. However, to discourage aggressive tax planning and misuse of tax arbitrage, promoters will face an additional buyback tax. As a result, the effective tax rate is pushed to 22 percent for corporate promoters and 30 percent for non-corporate promoters. As the Finance Minister explained, this move was introduced “to address the improper use of the buyback route by promoters.” How will the Buyback Tax Be Calculated Now? Under the new system, buyback gains will be taxed just like regular capital gains: Capital Gains = Buyback Price – Cost of Acquisition For example, if you bought a share at Rs. 100 and sold it in a buyback at Rs. 150, your taxable gain would be Rs. 50. This is generally more favourable than dividend taxation, which could earlier go up to 30 percent depending on your income slab. To prevent the buyback route from being used purely as a tax-arbitrage tool, the government has kept higher effective tax rates for promoters: Analysts believe this change could make buybacks less attractive for promoter groups, prompting companies to rethink how they return cash to shareholders – possibly through dividends, capex, or increased spending on R&D. For individual investors, though, the new framework is largely positive, offering clearer rules and, in many cases, a lower tax burden compared to the earlier slab-based dividend taxation. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies ontradebrains.inare their own, and not that of the website or its management. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution while investing or trading in stocks. Trade Brains Technologies Private Limited or the author are not liable for any losses caused as a result of the decision based on this article. Please consult your investment advisor before investing. Shivani is a Financial Analyst with 5+ years of experience in finance writing, including 3+ years of hands-on experience in financial analysis. She has extensively covered trending themes across key sectors like green energy, banking, insurance, chemicals, IT, and other emerging industries, while analysing sectoral trends and company fundamentals. Her expertise also includes analysing private equity and venture capital acquisitions, providing comprehensive market overviews, and tracking FII/DII investment movements to gauge overall market direction and investor sentiment.