Changes to the budget tax code to boost the buyback momentum of large, cash-rich IT caps

IT Firms Likely to Resume Share Buybacks After Budget Tax Changes

Cash-rich IT services companies may soon return to share buybacks as a preferred way to reward shareholders, following tax changes announced in the Union Budget, industry experts said.

The government has reclassified buybacks under capital gains tax, reducing the overall tax burden for many investors. This move is expected to make buybacks more attractive again for the $280-billion Indian IT industry, which has historically used them to return excess cash to shareholders.

“It is expected that IT firms will continue with buybacks as a tool to return capital because it allows them to distribute cash without triggering heavy tax burdens, especially for retail investors,” said Aditi Goyal, partner for tax practice at Trilegal.

Earlier, changes introduced in the 2024 Budget had shifted the tax burden from companies to shareholders, treating buyback proceeds as “deemed dividends.” This meant tax was levied on the full payout amount rather than just the profit, discouraging companies and investors from opting for buybacks.

Before that rule change, major IT firms frequently used share repurchases. Tata Consultancy Services and Wipro conducted five buybacks each, Infosys four, HCLTech two and Tech Mahindra one.

After the tax changes, Infosys was the only large IT firm to announce a buyback in 2025, worth Rs 18,000 crore. However, promoters chose not to participate due to the higher tax impact.

Under the revised framework, buybacks will now be taxed as capital gains — 22% for corporate shareholders and 30% for non-corporate entities, plus surcharge and cess. Importantly, only the profit portion will be taxed, not the entire payout, reducing the tax liability.

Shriram Subramanian, founder of InGovern Research Services, said this change makes buybacks attractive again for domestic investors and minority shareholders.

Analysts at Kotak Securities also noted that while promoters may still face higher taxes, the new structure is more favourable overall and likely to encourage companies to restart buybacks.

Experts added that since many IT companies have large cash reserves but limited high-return investment opportunities, they may use a mix of buybacks, special dividends or both to return capital to shareholders.