My startup wants to run a buyback for early employees and angels. How is that taxed from 1 April 2026?
As a sale, which is good news for most of the people taking part. From 1 April 2026 the money a shareholder gets in a buyback is taxed as capital gains, so they pay tax only on the gain over what the shares cost them (for an ESOP holder, the fair market value on the day they exercised). Unlisted shares held for more than 24 months are taxed at 12.5% without indexation, and shorter holdings at slab rates. That replaces the rule from October 2024 to March 2026, which taxed the whole payout as a dividend at slab rates. The exception is anyone treated as a promoter, which includes any shareholder with 10% or more: an additional tax takes their effective rate to about 30% for an individual and 22% for a company, so a founder selling into the same buyback pays more than the team. Price and structure it with your CA, and tell employees in writing what they will take home.
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A venture investor's reading of the Budget 2026 change to buyback taxation and what it means for founders, early employees and investors in private startups.
A founder-facing walk through the switch from the Income-tax Act, 1961 to the 2025 Act on 1 April 2026: the single tax year, the renumbered sections and forms, what carried over unchanged and what Budget 2026 did change, including buybacks.
The 2025 Act is largely a restatement: rates, deductions and core principles carry over, while sections, rules and form names are renumbered (Form 16 becomes Form 130).
The 'previous year' and 'assessment year' pair is replaced by one tax year; returns for FY 2025-26 are still filed under the 1961 Act and the first return under the new Act is due in 2027.
Every ESOP scheme, agreement and TDS system that cites a 1961 section needs its references updated.
From 1 April 2026 a share buyback is taxed as capital gains for the shareholder, with promoters paying more.
Once you have negotiated the pool size, this is the guide that stops the pool from becoming a tax trap for the very employees it rewards. It walks the full Indian lifecycle (no tax at grant or vesting, perquisite tax at exercise on the FMV-minus-exercise-price spread, capital gains at sale) and explains the deferral that lets employees of startups holding both DPIIT recognition and the 80-IAC certificate push the exercise-stage perquisite tax out, plus the Category I merchant banker FMV valuation you actually need.
ESOPs are taxed twice in India: as a salary perquisite at exercise (on the FMV minus exercise price spread) and again as capital gains at sale, with FMV at exercise becoming the cost base.
A low exercise price widens the taxable spread at exercise, so the exercise price is a deliberate design lever, not an afterthought.
Startups holding both DPIIT recognition and the 80-IAC certificate let employees defer the exercise-stage perquisite tax, which is the single biggest lever for making the pool actually valuable to employees.
The official Indian government primer on structuring ESOPs for startups, a primary source on the rules that most blog posts paraphrase. Essential before you promise equity to early hires.
