Simplified buyback rules: Know your tax outgo

Last week, Wipro approved its sixth and largest-ever share buyback programme, worth Rs 15,000 crore, involving up to 60 crore equity shares with a face value of Rs 2 each at Rs 250 per equity share. The proposal represents about 5.7% of the total paid-up capital. Unlike Infosys, its founder, Azim Premji, and the promoter group are participating in it. As of December 31, 2025, they hold 72.63% stake and expect to complete the whole exercise in the first quarter of 2026-27.

Now, come to the changed tax rules. What has changed in buyback taxation rules effective from April 1, 2026? Whether the promoters bear additional taxes? What does the new tax regime mean for other investors? Let us examine these issues.

What is buyback of shares?

To dissect, it is the company’s act of purchasing its own shares from the existing shareholders. A company is allowed to use its free reserves, securities premium, and the proceeds of issue of any shares for the said purpose. Advantages for the company, it will improve the earnings per share, return on capital and net worth, and a positive market perception. For the shareholders, they can expect an easy exit with a higher premium - in the Wipro case, as on April 16, implying a 19% premium on the closing price of Rs. 210.15 per equity share - compared to market offers, subject to applicable taxes. Those who retain can expect long-term wealth creation due to a change in shareholding pattern, but over a period of time.

Tax rules up to March 2026

The Union Budget 2024-25, to treat both buyback and dividend payouts in the same manner, introduced certain changes to the buyback taxation. Accordingly, the income from buyback of shares by companies shall be chargeable in the hands of the recipient investor as ‘dividend income’. In other words, shareholders were compelled to pay taxes on the full buyback amount as per the income tax slabs applicable to them, which was up to 30% plus cess in some cases.

For shareholders, the associated cost incurred on purchasing such shares are allowed as a capital loss and adjusted against other capital gains. The full consideration received by such shareholder for the computation of gain shall be deemed to be ‘nil’. Due to that, the cost of acquisition of such shares would generate a capital loss in the hands of the shareholder. No expense was allowed as a deduction in the hands of shareholders.

Thus, the buyback offers on or after October 1, 2024 and up to March 31, 2026, shall be governed by the old buyback taxation rules. For instance, Fairchem Organics Ltd. and Go Fashion (India) Ltd. have completed their buybacks in February, 2026.

Tax rules from April 2026

The Union budget 2026-27 has brought back the buyback taxation to the capital gains system, with effect from April 1, 2026. As per the Income Tax Department, shareholders other than promoters shall be subject to tax at 12.5% - after annual exemption of Rs. 1.25 lakh - in case of long-term capital gains, listed and unlisted, and 20% on short-term listed and applicable rate on short-term unlisted.

A twist for promoters: To plug the tax arbitrage, the latest Union Budget has introduced a ‘Special Additional Tax’ on promoters to level the playing field. Accordingly, capital gains will be taxed effectively at 22% roughly in the case of corporate promoters and 30% roughly for non-corporate promoters. The payment of buyback consideration to resident and non-resident shareholders is subject to TDS at 10% and 20%, respectively.

A comparison: Now, buyback proceeds will be treated as capital gains under the head ‘Income from Capital Gains’. Earlier, it was treated as ‘Deemed Dividend’ and taxed under the head ‘Income from Other Sources’. Now, only actual profits, i.e. sale price minus purchase price, are subject to tax at 12.5% in the case of long-term and 20% in the case of short-term. Earlier, the entire proceeds were subject to tax as per applicable tax slabs. Now, it is possible to claim the cost of acquisition from the sale price itself. Earlier, it was treated as a capital loss. Wipro Ltd., Aurobindo Pharma Ltd., Cyient Ltd and other upcoming buyback offers shall be governed by the new taxation rules.

Is it a reduction of capital?

On April 7, the Delhi High Court, relying on the principles of company law, income-tax law and common prudence, settled a controversial issue. It was held that the buyback of shares constitutes a reduction of capital rather than an acquisition of an asset for tax purposes.

The new buyback taxation rule is simple and more beneficial to the small shareholders. For promoters, the tax liability will largely remain similar if it is taxed as a dividend.