While promoters may find the new tax rates less attractive than the pre-2024 era, the retail and institutional investor community will likely welcome the lower, more transparent capital gains rates, writes Vishal Hakani, Managing Director and M&A Tax Leader, Alvarez & Marsal India.

The finance minister has introduced a major overhaul of the share buyback taxation framework. It is proposed that share buybacks will now be taxed as "capital gains", from the characterisation of "deemed dividend", which was announced by the Finance Act, 2024.

As per the amendment, promoters will have to pay an additional buyback tax on corporate shareholders as well as promoters in will make for an effective tax rate of 22% for corporate promoters. For non-corporate promoters, the effective tax rate will be 30%. Additionally, investors can now offset acquisition costs directly, instead of being required to carry forward the loss for potential utilisation in the future.

While promoters may miss the pre-2024 era, the current shift provides a cleaner and more honest tax framework. By decoupling minority shareholders from promoter-level tax concerns, the Finance Bill, 2026, seeks to ensure that the buyback remains a viable tool for returning value to minority shareholders.

The following are some of our high-level thoughts on key scenarios that will be impacted by this amendment:

• Individual/Small Shareholders - Listed companies that are largely run by professionals (institutional investors, domestic institutions, etc.), will not be subject to additional tax and shall be liable to pay tax at 12.5%1, assuming the gains are long term.
• Minority Squeeze-Out - Promoter-driven listed companies intending to squeeze out minority shareholders and enhance their shareholding, will still look to undertake buybacks by not tendering their own shares.
• Foreign Company Buyback - Foreign companies having Indian shareholders and undertaking buyback shall also result in additional tax at 30%1. Earlier, this would have been taxed as capital gains at lower rate.
• Indian Company With Foreign Parent - This will also be taxed at 30%. Given that the withholding tax rate on dividend under the Indian tax laws / tax treaty would have been lower, this amendment will result in additional tax leakage, as dividend would have been more beneficial as compared to capital gains.

In light of the above, sectorally, cash-rich sectors such as IT, pharma, and FMCG may continue buybacks where retail participation is high, while multinational corporations with foreign promoters may prefer dividends, as dividend upstreaming, especially with treaty benefits, could be more tax-efficient than buybacks post-amendment.

Ultimately, this overhaul brings much-needed predictability and simplicity. While promoters may find the new rates less attractive than the pre-2024 era, the retail and institutional investor community will likely welcome the lower, more transparent capital gains rates.

The author, Vishal Hakani is a Managing Director and M&A Tax

The article is an intellectual property of CNBC TV18