Union Budget 2026 was released on February 1, 2026, and brought several important changes for equity investors. While the long-term capital gains (LTCG) and short-term capital gains (STCG) tax rates were not altered, the Budget introduced these major modifications:
These changes will influence both the cost of investing and the post-tax returns for many equity market participants. Let’s understand these changes in detail.
Table of Content
1. The New Buyback Taxation Rules
A buyback is when a company purchases its own shares from shareholders at a fixed price. For investors, it is one way of receiving money from the company, similar to dividends. Before the changes introduced in the Union Budget 2026, buybacks were taxed as follows:
Buyback money received by public shareholders was treated as “dividend income.”
It was taxed according to the individual’s income tax slab.
The entire buyback amount was taxable (not just the profit).
Cost of acquisition of the shares extinguished on buyback was recognised separately as a capital loss and allowed to be carried forward.
What Budget 2026 Proposes (New Rule Applicable from FY27)
Buybacks of shares will now be taxed as capital gains (not dividends). Starting April 1, 2026, only the “profit portion” will be taxed and will be calculated as follows:
Profit = Buyback Price − Cost of Acquisition (Purchase Price + brokerage, if any)
Next, the capital gains rules will apply as follows:
| Nature of Capital Gains | Holding Period | Tax rate | Exemption |
| Long-Term Capital Gains (LTCG) on listed shares | More than 12 months | 12.5% | ₹1.25 lakh per financial year |
| Long-Term Capital Gains (LTCG) on unlisted shares | More than 24 months | 12.5% | NA |
| Short-Term Capital Gains (STCG) on listed shares | Upto 12 months | 20% | NA |
| Short-Term Capital Gains (STCG) on unlisted shares | Upto 24 months | Applicable slab rates | NA |
It is to be noted that the rebate under Section 87A does not apply to capital gains chargeable to tax under section 112A of the Income-tax Act, 1961. As a result, even if your total income is under ₹12 lakh, capital gains tax still applies and must be paid. For more clarity, let’s study an example.
Assume that:
Shares are bought at ₹300 (Cost of Acquisition).
Buyback price is ₹700.
No. of shares is 1,000.
Holding period is 3 years (long-term).
Now, if we calculate:
Buyback amount received is ₹7,00,000 (₹700 per share x 1,000 shares)
Cost of Acquisition = ₹3,00,000 (₹300 per share x 1,000 shares)
Capital Gain = ₹4,00,000 (₹7,00,000 - ₹3,00,000)
Let’s see the taxation rules:
| Before April 1, 2026 (Old Rules) | After April 1, 2026 (New Rules) |
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Introduction of “Promoter Taxation”
A promoter is a person or entity that controls or manages the company. This can be:
The founder or the founding family
A holding company
A foreign parent company
Note that promoters are not ordinary public shareholders. Now, as per the Union Budget 2026, these promoters are required to pay “additional buyback tax” as follows:
| Aspect | Corporate Promoters | Non-corporate Promoters |
| Tax on Buyback Gains | 22% | 30% |
This tax rate applies to both long-term and short-term holding periods.
2. STT on Futures and Options Increased
STT (Securities Transactions Tax) is charged on stock market transactions. It is deducted automatically when a trade is executed. The stock exchange or broker collects it and sends it to the government. STT applies to:
Equity shares
Futures and options (F&O)
Equity mutual funds
Some IPO and offer-for-sale transactions
Now, in the Union Budget 2026, the government has increased STT on derivatives (both Futures and Options) as follows:
| Derivatives | Old Rate | New Rate | Who Pays |
| Futures | 0.02% | 0.05% | Seller |
| Options (When Option is Sold) | 0.10% | 0.15% | Seller |
| Options (When Option is Exercised) | 0.125% | 0.15% | Buyer |
Note that there is no change in:
Equity delivery trades
Intraday equity trades
Equity funds
The above new rates apply from April 1, 2026 (FY 2026–27).
3. Increase in Investment Limits for PROIs
PROI means Persons Residing Outside India. This term usually refers to:
NRIs
Overseas citizens or individuals living outside India
Members of the Indian diaspora who invest from abroad
Realise that they are individual investors (not foreign companies or institutions).
Such individuals make investments in Indian companies via:
Foreign Direct Investment (FDI) or
Foreign Portfolio Investment (FPI)
Now, before the Budget 2026, a single PROI could invest up to 5% in a listed Indian company. Whereas, if we talk about “combined investment limit,” all PROIs together could hold up to 10% in one company. But after the Union Budget 2026, these investment limits have been increased as follows:
| Category | Earlier limit | New limit* |
| Single PROI investment | 5% | 10% |
| All PROIs combined | 10% | 24% |
*This applies only to listed Indian companies.
Conclusion
So now you know the latest changes introduced in the Union Budget 2026 for an equity investor. If we were to recap, first, share buybacks will no longer be taxed as dividends. Instead, the arising profit will be taxed as capital gains.
Second, the STT has been increased for futures and options. The STT rate of futures has increased from 0.02% to 0.05%. In contrast, the STT rate for options has increased to 0.15%. Equity delivery and mutual fund STT remain unchanged.
Lastly, the Budget 2026 also raises equity investment limits for PROIs. The limit for a single PROI has been doubled to 10%, whereas the combined limit has been increased to 24%.
Disclaimer
The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.
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