Sitharaman says corporate promoters to pay 22 per cent buyback tax, emphasises tax simplification

Finance Minister Nirmala Sitharaman on Sunday announced a significant overhaul in the taxation of share buybacks.

Under the new rules, all buybacks will be taxed as capital gains, with corporate promoters required to pay an effective rate of 22 percent and non-corporate promoters facing 30 per cent, Sitharaman said in her union Budget 2026‑27 presented in Parliament.

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The step is aimed at curbing the misuse of buybacks by promoters as a tool for tax arbitrage, ensuring greater transparency in corporate capital management. Analysts said the change signals the government’s intent to make the equity market more compliant and fair, while continuing its focus on simplifying the tax regime.

Experts noted that corporate promoters who have frequently used buybacks to extract surplus funds from companies at minimal tax liability, may need to revisit their strategies. “This is a clear move to disincentivize tax planning around buybacks,” said a senior chartered accountant in Mumbai.

Market participants are expected to factor in the higher levy while planning buybacks in the current financial year, with some companies possibly adjusting dividend payouts or capital allocation plans.

Investors may see short-term shifts in stock movements as buyback decisions are reassessed in light of the revised taxation.
The Finance Minister’s announcement forms part of a wider set of direct tax reforms, including simplification of the Income Tax Act and rationalization of TCS and Securities Transaction Tax rates, reflecting the government’s broader effort to improve compliance and encourage a more transparent financial ecosystem.

Sitharaman announced that the Income Tax Act, 2025 will come into effect from April 1, 2026. Income tax rules and forms will be simplified and notified in due course, allowing taxpayers adequate time to familiarize themselves with the new requirements.

The redesigned forms aim to make filing easier for ordinary citizens.

To streamline accounting and compliance, a Joint Committee of the Ministry of Corporate Affairs and the Central Board of Direct Taxes will be constituted to align Income Computation and Disclosure Standards (ICDS) with Indian Accounting Standards (IndAS).

Separate accounting under ICDS will be discontinued from the 2027‑28 tax year.

In addition, the definition of ‘accountant’ under Safe Harbour Rules will be rationalized to support the government’s vision of developing homegrown accounting and advisory firms into global leaders.

The Budget also rationalized Tax Collection at Source (TCS) rates. Sellers of alcoholic liquor, scrap, and minerals will be taxed at 2 percent, while the TCS on tendu leaves has been reduced from 5 percent to 2 percent.

Under the Liberalised Remittance Scheme, remittances exceeding Rs10 lakh will attract TCS of 2 per cent for education or medical purposes and 20 per cent for other purposes.

Securities Transaction Tax (STT) has been revised upward: futures will be taxed at 0.05 per cent (from 0.02 per cent), while options premium and exercise will be taxed at 0.15 per cent (up from 0.1 per cent and 0.125 per cent respectively). Analysts said the increase may slightly affect derivatives trading activity.

To encourage corporates to adopt the simplified tax regime, set-off of brought forward Minimum Alternate Tax (MAT) credit will be allowed only in the new regime, limited to one-fourth of the tax liability.

From April 1, 2026, MAT will become a final tax at 14 per cent, down from 15 per cent. Accumulated MAT credits until March 31, 2026, will remain available for set-off in the new system.

Market watchers noted that these measures collectively aim to streamline tax compliance, improve transparency, and incentivise companies to migrate to the simplified corporate tax regime, while reducing opportunities for tax arbitrage.