The provisions of the Finance Bill, 2026 (“the Bill”) relating to direct taxes propose amendments to the Income-tax Act, 2025 (“IT Act” or “2025 Act”) and the Income-tax Act, 1961 (“1961 Act”). The 2025 Act will come into force with effect from 1st April, 2026. Accordingly, this brief synopsis covers a summary of key amendments made in 2025 Act.
Amendments covered in this analysis:
- Buy-back of shares now taxable as Capital Gain in the hands of the recipient
- Rationalization of Minimum Alternate Tax Provisions
- Rationalisation of TCS rates for certain remittances under the Liberalised Remittance Scheme (LRS)
- Relaxation from requirement to obtain tax deduction and collection account number (TAN) by a resident individual or HUF, where the seller of the immovable property is a non-resident
- Comprehensive review of NDI Rules and Change in PROI investment limits
1. Buy-back of shares now taxable as Capital Gain in the hands of the recipient
Existing provision:
Section 2(40)(f) of the Income Tax Act, 2025 (“IT Act”) provides that the sum received by a shareholder on buy-back of shares by a company shall be treated as dividend in the hands of shareholders and shall be charged to income-tax at applicable slab rate (highest effective tax rate being 35.88% in case of an individual shareholder and 25.17% in case of a company, assuming the company has opted to pay tax under Section 200 of the IT Act).
Further, the cost of acquisition of the shares bought back is allowed as capital loss to the shareholders under section 69 of the IT Act, which can be adjusted against capital gains in the same or subsequent years subject to the provisions of the IT Act relating to set-off of losses.
Proposed amendment:
The existing mechanism treating buy-back receipts as dividend income led to anomalies and therefore it is proposed to rationalise the taxation of buy-back.
It is proposed that any sum received by a shareholder on buy-back of shares shall be chargeable to tax under the head “Capital Gains”. The difference between the consideration received on buy-back and the cost of acquisition of the shares shall be deemed to be capital gains arising to such shareholder.
The proposed tax rates on such capital gains are set out below:
shareholder is a domestic company
Shareholder other than a domestic company
Non-promoters (normal capital gain tax rates)
Listed Equity Shares (on which STT is paid)
Listed/Unlisted Share or Securities
Promoters (normal capital gain tax rates + additional tax rates)
Listed Equity Shares (on which STT is paid)
Listed/Unlisted Share or Securities
In the case of listed companies, “promoter” shall have the meaning assigned under regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018 and in the case of other companies, “promoter” shall mean a “promoter” as defined in Section 2(69) of the Companies Act, 2013 or a person holding, directly or indirectly, more than 10% of the shareholding in the company.
This amendment will take effect from 1st April, 2026.
Impact:
Although the buy-back of shares is proposed to be taxed as capital gains, the effective tax rate for promoters is expected to remain broadly aligned with the dividend taxation.
The proposed change allows deduction of the cost of acquisition while computing capital gains on buy-back, unlike the existing regime where such cost was allowed as a capital loss, available for set-off in accordance with the provisions of the IT Act.
Buy-back of shares by foreign companies deriving substantial value from assets located in India (i.e. indirect transfer) may be taxable as capital gains in India, subject to the availability of relief under applicable double taxation avoidance agreements.
2. Rationalization of Minimum Alternate Tax provisions
Existing provision:
Section 206 of the IT Act provides for the levy of Minimum Alternate Tax (MAT) on thebook profit of a company at the rate of 15%, except in the case of unitslocated in an International Financial Services Centre (IFSC).
The MAT paid in excess of the tax payable under the normal provisions is allowed as a tax credit. Such MAT credit may be carried forward for a period of fifteen assessment years and set off in subsequent years against the tax payable under the normal provisions to the extent such tax exceeds the MAT liability.
The MAT provisions are applicable only under the old tax regime.
Proposed amendment:
The rate of MAT is proposed to be reduced from 15% to 14% of book profit.
It is proposed that the tax paid under the provisions relating to Minimum Alternate Tax (MAT) shall be treated as final tax under the old tax regime, and no further MAT credit shall be allowed in respect thereof.
It is further proposed that, for domestic companies, the set-off of MAT credit accumulated up to 31st March 2026 shall be allowed only under the new tax regime from FY 2026 27 onwards. Moreover, such set-off shall be limited to 25% of the tax liability for the relevant tax year.
Upon conversion of a private company or an unlisted public company into a Limited Liability Partnership (LLP), the accumulated MAT credit shall neither be allowed to be carried forward nor set off.
In the case of foreign companies, the set-off of MAT credit is proposed to be allowed only to the extent of the difference between the tax payable on total income computed under the normal provisions and the MAT liability, for any tax year in which the tax payable under the normal provisions exceeds the MAT.
This amendment will take effect from 1st April, 2026.
Impact:
Treating MAT paid under the old tax regime as final tax would eliminate the ability of companies to carry forward and utilise MAT credit in subsequent years, thereby increasing tax certainty but potentially resulting in a higher effective tax cost. Further, limiting the availability of MAT credit set-off to the new tax regime, and capping such set-off for domestic companies at 25% of the tax liability, would constrain the extent to which companies can offset future tax liabilities. In the event of a conversion of a domestic private company or a domestic unlisted company into an LLP, any accumulated MAT credit shall lapse.
Overall, the changes would encourage a shifttowards the new tax regime while reducing the long-term accumulation of MAT credits for taxpayers.
3. Rationalisation of TCS rates for certain remittances under the Liberalised Remittance Scheme (LRS)
Existing provision:
Section 394(1) of the IT Act provides for tax collection at source (“TCS”) on remittances made under the LRS. TCS is applicable at the rate of 5% on the amount (or aggregate of amounts) exceeding ₹10 lakhs in a tax year where the remittance is for education or medical treatment, and at 20% on remittances made for any other purpose under LRS.
Proposed amendment:
It is proposed to reduce the TCS rate on LSR remittances made for education or medical treatment from 5% to 2% on the amount (or aggregate of amounts) exceeding ₹10 lakhs in a financial year.
These amendments will take effect from 1st April, 2026.
Impact:
The reduction in TCS rate will ease upfront cash-flow for resident individuals remitting funds abroad for education or medical treatment, particularly in cases involving large or time-sensitive payments. The existing reporting and collection framework under LRS remains unchanged, ensuring continued monitoring of foreign remittances. TCS rates applicable to LRS remittances made for other purposes remain unaffected.
4. Relaxation from requirement to obtain tax deduction and collection account number (TAN) by a resident individual or HUF, where the seller of the immovable property is a non-resident
Existing Provision:
Section 397(1)(a) of the IT Act requires every person deducting or collecting tax to obtain a TAN. Clause (c) of section 397(1) provides specific exclusions where obtaining a TAN is not required. Currently, buyer purchasing an immovable property from a resident seller is not required to obtain TAN for deducting TDS on the consideration. However, where the seller is a non‑resident, the resident buyer is required to obtain a TAN for deducting tax at source, even in cases where the buyer is an individual or HUF undertaking a one‑off purchase transaction.
Proposed amendment:
It is proposed to amend section 397(1)(c) of the IT Act to provide that a resident individual or HUF shall not be required to obtain TAN for the purpose of deducting tax at source on consideration for the transfer of an immovable property under section 393(2) of the IT Act, which pertains to payments made to a non‑resident payee/seller.
The amendment is proposed to take effect from 1st October,2026.
Impact:
The proposed amendment will allow resident individuals and HUFs involved in one-off immovable property transactions to comply with TDS obligations without obtaining a TAN, significantly reducing procedural and compliance burden, while continuing to ensure effective tax collection from non-resident sellers.
5. Comprehensive review of NDI Rules and Change in PROI investment limits
Existing Provision:
As per Rule 12(1) read with Schedule III of the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (‘NDI Rules’), Person Resident Outside India (PROI) are permitted to invest in equity instruments of listed Indian companies through the Portfolio Investment Scheme.
Investment limits:
1. Individual PROI limit:
Up to 5% of the paid-up equity capital of a listed Indian company
2. Aggregate limit for all individual PROIs:
Up to 10% of the paid-up equity capital of the listed Indian company (the aggregate ceiling may be raised to 24 percent if a special resolution to that effect is passed by the General Body of the Indian company). Section 206C(1H) of the IT Act provides that any person being a seller, who receives consideration for sale of any goods of the value or aggregate of value exceeding INR 50 lakhs in any previous year, is required to collect tax from the buyer at the rate of 0.1% of the sale consideration exceeding INR 50 lakhs.
Proposed Amendment:
During the delivery of the Union Budget 2026 speech, it was proposed to undertake a comprehensive review of the NDI Rules to create a more contemporary and user-friendly framework for foreign investments consistent with India’s evolving economic priorities.
Further it has been proposed to amend the NDI Rules to increase the investment limit as follows:
1. Individual PROI limit:
From 5% to 10% of the paid-up equity capital of a listed Indian company.
2. Aggregate limit for all individual PROIs:
From 10% to 24% of the paid-up equity capital of the listed Indian company.
Impact:
Higher caps allow greater participation by individual PROI, improving capital inflows into Indian equity markets, better liquidity and price discovery. This amendment would have to be carried out through amendment in NDI Rules.
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