09 Feb 2026
The Finance Bill, 2026, introduces targeted tax changes relevant for M&A transactions, including revised treatment of share buybacks, changes to Minimum Alternate Tax credit utilisation, and restrictions on interest deductions against dividend income. These measures are expected to influence profit repatriation strategies, transaction structuring and acquisition financing going forward.
Partners: Himanshu Sinha, Komal Dani and Aditi Goyal, Counsel: Rohit Kumar S, Senior Associate: Aishwarya Palan, Associates: Hiren Majethia, Niraj Chowdhury, Paras Arora, U Shreyas
The Finance Bill, 2026 (Bill), introduced on 1 February 2026, proposes focused changes to rationalise and simplify the Mergers and Acquisitions (M&A) related tax framework.
The key proposals impacting companies, shareholders and the broad M&A tax framework are outlined below.
The taxation on buyback of shares in India has undergone significant changes over the years. Prior to 2013, buyback proceeds (net of cost of acquisition) were taxable in the hands of shareholders as capital gains. The Finance Act, 2013, shifted the tax incidence from shareholders to the company, making the company undertaking the buyback liable to buyback distribution tax. Consequently, shareholders were exempt from tax on the buyback proceeds.
The Finance Act (No. 2), 2024 introduced a significant shift by reverting the tax incidence to shareholders. Under this revised regime, the entire buyback consideration, without deduction for the cost of acquisition, was treated as dividend income in the hands of shareholders and taxed as income from other sources. However, the cost of acquisition was allowed as a capital loss, which may be set off against capital gains in accordance with the provisions of the Income-tax Act, 1961 (ITA 1961).
The Bill now proposes to revert to the pre-Finance Act, 2013 framework, under which buyback consideration (net of cost of acquisition) will no longer be treated as dividend for tax purposes and once again be taxed as capital gains in the hands of the shareholders. However, this reversion is accompanied by an additional income tax levy on promoters, over and above the applicable capital gains tax. The total tax rates on buyback gains for promoters (exclusive of surcharge and cess) are summarised below:
| Nature of Capital Gain | Promoter – Domestic Company | Promoter – Other than a Domestic Company |
|---|---|---|
| Short-term capital gains referred to in Section 196 of the Income-tax Act, 2025 (ITA 2025) (corresponding to Section 111A of the ITA 1961) | 22% (20% + 2%) | 30% (20% + 10%) |
| Long-term capital gains referred to in Sections 197 and 198 of the ITA 2025 (corresponding to Sections 112 and 112A of the ITA 1961, respectively) | 22% (12.5% + 9.5%) | 30% (12.5% + 17.5%) |
Notably, no additional income tax is levied on short-term capital gains from unlisted shares, which will continue to be taxed at standard rates (slab rates, 22%, 25%, 30% or 35%, as applicable).
A significant clarification expands the scope of the term “promoter”. In addition to persons designated as promoters under the Companies Act, 2013 and SEBI regulations, the definition now includes any person (individual or entity) holding, directly or indirectly, more than 10% of the shares of an unlisted company. This substantially widens the scope of the additional tax to include significant minority shareholders.
Until 31 March 2026, corporate shareholders could claim a deduction for inter-corporate dividends received from buyback proceeds, provided these proceeds were subsequently distributed to shareholders a month before the income tax return due date. This prevented multiple layers of taxation on the same income stream.
However, from 1 April 2026, a two-tier taxation system is envisaged:
This approach will result in economic double taxation of a portion of the buyback proceeds, as the same income will be taxed initially at the corporate shareholder level and subsequently at the individual shareholder level, with no pass-through or relief mechanism.
The proposed changes are also expected to reduce ambiguity and simplify the process of claiming foreign tax credit for non-resident shareholders – a persistent challenge since 2013.
Historically, complexities arose because taxes were initially imposed at the company level under the buyback tax regime, and thereafter, upon its repeal, due to the misalignment between characterisation of capital gains and dividends in the treaty. The amendment now provides clarity on the nature of income and effectively addresses the tax inefficiencies that existed under the earlier regimes.
The proposed amendments will take effect from 1 April 2026 and will apply from tax year 2026-27 onwards. Consequently, companies face a narrow window to decide whether to execute a buyback by 31 March 2026 or defer it to 1 April 2026 or thereafter.
For instance, in the case of a shareholder resident in a jurisdiction that does not have a tax treaty with India, buybacks implemented up to 31 March 2026 will be taxed at 20% (plus applicable surcharge and cess), consistent with the rate applicable to dividend income. Conversely, any buybacks undertaken after 31 March 2026 would attract tax at 12.5% (plus applicable surcharge and cess), reflecting the capital gains tax rate, provided the shares have been held for more than 24 months and the shareholder does not qualify as a promoter.
In the same scenario, if the shareholder is based in a jurisdiction that has a favourable treaty with India – for instance, where the treaty caps the dividend tax rate at 10% or lower (such as Mauritius, which provides a 5% rate for corporate shareholders holding at least 10% shares directly) – then executing a buyback up to 31 March 2026 may be more tax efficient.
It is important to note that the cost of acquisition of shares is available as a deduction while computing capital gains. In contrast, where buyback proceeds are treated as dividends, the cost of acquisition is recognised only as a capital loss. The potential to utilise the cost of acquisition to offset capital gains may also impact the overall tax computation and should be carefully evaluated while deciding on a profit repatriation strategy and its timing.
The Bill proposes a restructuring of the Minimum Alternate Tax (MAT) framework to facilitate a transition to the new corporate tax regime. It is proposed that the MAT rate be reduced from 15% to 14%, and that MAT be treated as a final tax, with no further accumulation of MAT credits.
For companies migrating to the new tax regime on or after 1 April 2026, existing brought-forward MAT credits may continue to be utilised; however, the set-off is capped at 25% of the annual tax liability. Any unutilised balance may be carried forward within the prescribed statutory time limits. Importantly, companies that continue under the old tax regime—for instance, to retain eligibility for tax holidays—will not be permitted to utilise existing MAT credits.
From an M&A and valuation perspective, this restriction on MAT credit utilisation is particularly significant for targets with substantial accumulated MAT credits. The 25% cap on set-off can adversely impact free cash flows, potentially resulting in lower valuations under the discounted cash flow (DCF) method.
Companies must therefore undertake a careful cost–benefit analysis as follows:
Under the ITA 2025, dividend income, income from mutual fund units are treated as passive investment income taxable under the head “Income from other sources”. Currently, interest expenditure incurred to earn such income is deductible, subject to a cap of 20% of gross income.
The Bill proposes to completely disallow any interest deduction in relation to this income, resulting in taxation on a gross basis.
This amendment appears to be driven by the government’s objective of simplifying taxation of passive investment income. Allowing interest deductions against dividend and mutual fund income has historically led to frequent disputes on whether the borrowing was directly linked to earning such income, the method of allocating common interest costs, and the applicability of the statutory cap. By fully disallowing interest deductions, the amendment removes the need for subjective attribution and reduces litigation. It also aims to ensure parity between investors who acquire shares using borrowed funds and those who invest using their own capital.
However, this amendment can adversely impact investment holding companies that have borrowings and receive dividends from their subsidiaries. This change also has significant implications for leveraged buyout (LBO) structures, where acquisition financing is commonly serviced through dividend distributions from the target entity. The restriction on setting off interest expenditure against dividend income increases the overall effective tax cost and may necessitate re-evaluation of traditional leverage models.
This amendment is proposed to take effect from 1 April 2026 and will apply from tax year 2026-27 onwards. While the responses to the frequently asked questions issued by the Central Board of Direct Taxes clarify that the amendment is intended to apply from tax year 2026-27, the Memorandum to the Bill appears to contain a typographical inconsistency, indicating an effective date of tax year 2025-26.
Overall, the proposals seek to address ambiguities and simplify key aspects of the corporate tax framework. The reversion to capital gains-based taxation for buybacks, coupled with promoter-level taxation, is likely to influence profit repatriation strategies. Changes to the MAT regime and the disallowance of interest deductions against dividend income may also affect deal valuation and acquisition financing. How these measures shape transaction structuring and investor behaviour will be central to deal planning as the amendments take effect.
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