Share buyback tax in India: how buybacks are taxed since October 2024

A buyback is a company paying holders to hand their shares back, after which the shares are cancelled. Companies do it to return spare cash, to cut the number of shares outstanding, or to give early investors and employees a way out without an IPO.

Under section 68 of the Companies Act 2013, a buyback needs board and sometimes shareholder approval, and it is limited to a share of the company's paid-up capital and free reserves. The usual cap is 25%, and a debt-to-equity limit applies after the buyback. Listed companies also follow the SEBI Buy-back Regulations, 2018.

The company paid a tax of its own, under section 115QA of the old Income-tax Act, on the gap between what it paid for the shares and what the holders originally paid for them. The effective rate was about 23.3% including surcharge and cess. The shareholder received the money without paying further income tax on it.

That made buybacks popular with promoters and investors, since the tax fell on the company.

The Finance (No. 2) Act, 2024 abolished the company-level tax for buybacks from 1 October 2024. The full amount received by the shareholder was treated as a dividend and taxed at the holder's slab rate. No deduction was allowed for the cost of the shares against that dividend.

To soften this, the cost of the shares was treated as a capital loss. That loss could be set off against capital gains and carried forward for eight assessment years, but not against the dividend itself. For a holder in a high bracket, the result could be heavy, since the whole payout, not only the profit, was taxed.

The Income-tax Act, 2025 came into force on 1 April 2026. As reported in September 2026 coverage, it brought buybacks back into the capital-gains framework for shareholders. The shareholder is taxed on the amount received minus the cost of the shares, as if the shares were sold.

For listed shares held by non-promoters, reports give 12.5% for long-term and 20% for short-term gains. For unlisted shares, the long-term rate is generally 12.5% after 24 months. A separate extra tax is reported for specified promoters. The details differ from case to case, so read the current Act.

• Before 1 October 2024: the company paid tax, and the holder paid none.
• 1 October 2024 to 31 March 2026: the full payout was dividend for the holder, with the cost as a capital loss.
• From 1 April 2026: gain taxed as capital gains, with extra tax for specified promoters.

Startups sometimes buy back vested ESOPs, so employees can cash out before an IPO. The tax stage depends on the date of the buyback. For employees, the shares were taxed as a perquisite at exercise, and the exercise-day value is the cost for the later gain.

If an employee exercised at a fair value of ₹100 and the company buys the share back at ₹140, the gain on the buyback is ₹40 under the current approach. Under the dividend regime, the whole ₹140 would have been taxed as dividend. An ESOP buyback therefore needs the dates and the rules of that date checked.

The October 2024 change was framed as a way to align buyback tax with dividend tax and to close a gap, since a company could return cash through a buyback and avoid tax in the holder's hands. Investors argued that taxing the full payout, not only the profit, was too harsh, especially for people who had bought at a high price and were selling at a loss.

The 2025 Act brought the rule back to a simpler approach for most holders, as the September 2026 coverage describes, while keeping an additional levy on promoters to deter tax-driven buybacks. Because the rules have moved three times in about 18 months, a buyback agreed in one year and completed in another needs a check of which date counts.

A private company doing a buyback still follows Companies Act rules. It needs the right approvals, must keep within limits, and must extinguish the shares within a short period. It cannot issue the same kind of shares again for a period after the buyback, other than certain bonus or conversion cases.

Funds should come from free reserves, a securities premium account or the proceeds of an earlier issue, not from a fresh issue of shares of the same kind. A company should file the required returns and keep records of the cancelled shares.

In a secondary sale, an outside investor buys shares from existing holders, and the company's cash is not used. In a buyback, the company pays and the share count falls. A buyback uses the company's cash, which a growing startup may prefer to keep. A secondary sale is usually simpler and tax is the seller's own.

Founders often choose a secondary when cash is short and a buyback when the company has spare cash and wants to reward early holders. The tax treatment of each differs, so model both.

Tax withholding is a second point. Where the buyer or the company must deduct tax at source, the amount received in hand can be lower than the headline price, and the holder then claims credit for the tax in the return. Non-resident holders face extra steps, since withholding rates and treaty relief depend on the holder's country and on the papers provided.

A third point is timing within the financial year. A buyback completed in March and one completed in April can fall under different rules, as the 2026 change showed. When a company has set a record date, holders should find out which date the tax law treats as the date of transfer before they plan.

Confirm the date of the buyback, since the law changed in October 2024 and April 2026. Check whether the shares are listed or unlisted, how long they were held and the cost basis. Ask whether the company will deduct tax at source. Compare the offer with a sale to another buyer.

This is a general explanation, not tax or legal advice. Tax law on buybacks has moved quickly, so check with a chartered accountant before signing.