- Buyback proceeds now taxed as capital gains, altering after‑tax yields for shareholders.
- Promoter levy raises effective tax to 22% (corporate) / 30% (non‑corporate), curbing tax‑avoidance.
- Safe harbour margin for IT services jumps to 15.5% with a ₹2,000 cr ceiling, slashing transfer‑pricing disputes.
- Cash‑rich IT majors – TCS, Infosys, Wipro – stand to gain from clearer tax treatment and higher cash‑return efficiency.
Most investors missed the tax twist in the budget – and they’re paying for it.
Why India's Buyback Tax Shift Impacts the IT Sector
The Union Budget has re‑characterised every corporate buyback as a capital‑gain event for shareholders. Earlier, the 2024 rule treated the entire amount as dividend income, subject to slab‑rate personal tax. By moving the liability to capital gains, the government standardises the tax base and eliminates the dividend‑like loophole that many IT firms exploited to return cash efficiently.
For cash‑rich IT companies—TCS, Infosys, Wipro—the change is a double‑edged sword. On the one hand, shareholders now enjoy a clearer, often lower, tax rate (15% long‑term CGT plus surcharge) compared with the highest personal income slabs that could reach 30%+ for dividend income. On the other hand, promoters (the founding families and major shareholders) face an extra levy that pushes their effective tax to 22% for corporate promoters and 30% for non‑corporate promoters. This disincentivises the practice of using buybacks to sidestep higher dividend tax, aligning promoter tax treatment with ordinary shareholders.
The net effect is a more transparent after‑tax return on buybacks, which could make such programmes more attractive to institutional investors who track net yield. Expect a modest uptick in buyback announcements from IT giants as they redeploy excess cash now that the tax outcome is predictable.
Safe Harbour Overhaul: What the 15.5% Margin Means for IT Services
Safe harbour provisions (Section 92CB) let multinational enterprises pre‑define transfer‑pricing margins for cross‑border services, shielding them from costly audits. The budget consolidates a range of IT‑related services—software development, IT‑enabled services, KPO, loan guarantees, R&D contracts—under a single “IT services” bucket with a uniform safe harbour margin of 15.5%.
Two major shifts are noteworthy:
- The revenue ceiling jumps from ₹300 cr to ₹2,000 cr, expanding eligibility to mid‑size and large IT players.
- The safe harbour regime will be administered via an automated, rule‑driven portal, reducing manual paperwork and turnaround time.
For firms like TCS and Infosys, which regularly invoice subsidiaries and related parties overseas, the new margin offers a predictable compliance cost and eliminates the risk of retroactive transfer‑pricing adjustments. This could improve operating margins by 0.2‑0.4% annually—material at the scale of these companies.
Historical Lens: Past Buyback Tax Regimes and Market Reactions
India’s buyback tax landscape has evolved in three stages:
- Pre‑2023: Buybacks were tax‑free for shareholders, creating a de‑facto dividend substitute.
- 2023‑2024: The dividend‑like treatment introduced, taxing the entire amount at personal slab rates, which led to a surge in buyback announcements as companies rushed to lock in lower rates before the rule took effect.
- 2025 Budget (current): Capital‑gain treatment with promoter levy, standardising the tax incidence.
Each regime shift triggered short‑term volatility in IT stocks. The 2023 rule change saw a 4‑5% rally in TCS and Infosys as investors anticipated higher cash returns. However, the subsequent clarification in early 2024 caused a correction of 2‑3% when the tax burden on promoters became clearer. The current overhaul is likely to stabilize expectations, reducing speculative spikes and encouraging steady buyback pacing.
Competitor Playbook: How Tata, Adani, and Other Giants May React
While the budget language focuses on the IT sector, the tax and safe‑harbour reforms apply across industries. Tata Group’s IT arm (Tata Consultancy Services) will mirror the response of its peers, but Tata’s diversified portfolio allows it to offset any marginal tax impact with gains from its automotive and steel divisions.
Adani’s nascent foray into data‑center services may benefit disproportionately. The safe‑harbour ceiling of ₹2,000 cr is well within Adani’s projected revenue from its upcoming cloud‑infrastructure venture, granting it a compliance edge over smaller rivals.
Mid‑cap firms such as Mindtree and L&T Technology Services could see a relative advantage if they adopt the new safe‑harbour framework early, positioning themselves as “tax‑efficient” partners for multinational clients.
Investor Playbook: Bull vs Bear Cases
Bull Case
- Clearer tax treatment boosts investor confidence, leading to higher valuation multiples for IT stocks.
- Increased safe‑harbour ceiling reduces litigation risk, improving operating margins.
- Cash‑rich balance sheets enable more frequent, tax‑efficient buybacks, supporting EPS growth.
Bear Case
- Promoter levy could dampen the willingness of major shareholders to support large‑scale buybacks, limiting cash return upside.
- If the 15.5% safe‑harbour margin is deemed too low by global peers, companies may face pressure to renegotiate inter‑company pricing, potentially increasing compliance costs.
- Macro‑economic headwinds (global slowdown, currency volatility) could outweigh tax benefits, keeping stock performance muted.
Bottom line: The budget clears the fog around buyback taxation and provides a predictable safe‑harbour regime for IT services. For investors, the story is less about a single policy change and more about the cumulative impact on cash efficiency, margin stability, and risk reduction for India’s leading technology exporters. Align your portfolio accordingly—lean into the cash‑generating IT giants if you favour the bull narrative, or stay cautious if promoter tax pressure and broader macro risk dominate your outlook.