Buyback of Shares: Taxation

This area has changed twice in under two years and can change again. This article is for general information and does not constitute tax advice.

Which regime applies to you

The regime is fixed by the date the buyback consideration is paid to the shareholder, not the date the board approved it or the offer opened.

Payment date	Who pays	How it is taxed
Up to 30 September 2024	The company	Buyback distribution tax under Section 115QA. Proceeds exempt for the shareholder.
1 October 2024 to 31 March 2026	The shareholder	Entire consideration taxed as deemed dividend at slab rate. Cost of the extinguished shares allowed only as a capital loss.
From 1 April 2026	The shareholder	Capital gains under Section 69, cost deductible. Additional income-tax where the shareholder is a promoter.

The middle regime was the harsh one. A shareholder was taxed on the gross amount at slab rates while the cost sat stranded as a capital loss usable only against future capital gains. Buyback activity fell sharply as a result. That has now been undone.

How the gain is computed from 1 April 2026

Under Section 69 of the Income tax Act, 2025 (Section 46A of the 1961 Act), the difference between the buyback consideration and the cost of acquisition is capital gains in the shareholder’s hands. Whether it is short-term or long-term follows the ordinary rules for that security, and the rate follows the ordinary capital gains rates, set out in Capital Gain on Securities. For most unlisted company buybacks, shares held beyond 24 months are long-term at 12.5% without indexation.

Promoters pay more, and “promoter” is wider than it sounds

Where the shareholder is a promoter, an additional income-tax applies on top of the ordinary capital gains tax, set so the combined incidence works out at roughly 22% for a promoter that is a domestic company and 30% for every other promoter, before surcharge and cess. Surcharge on that additional tax is a flat 12%, whatever the level of total income.

Security bought back	Gain	Promoter that is a domestic company	Any other promoter
Listed equity shares	Long-term	22% (12.5% + 9.5%)	30% (12.5% + 17.5%)
Listed equity shares	Short-term	22% (20% + 2%)	30% (20% + 10%)
Unlisted equity shares, preference shares, other specified securities	Long-term	22% (12.5% + 9.5%)	30% (12.5% + 17.5%)
Unlisted equity shares, preference shares, other specified securities	Short-term	Applicable rates	Applicable rates

Two conditions decide whether the additional tax bites at all. First, it applies only to a buyback carried out under Section 68 of the Companies Act, 2013. Where a company acquires its own shares outside that route, capital gains are still computed under Section 69, but the additional promoter levy does not follow. Second, “promoter” is defined differently depending on listing. For a listed company, the meaning in regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018 applies. For any other company it is wider: a promoter as defined in Section 2(69) of the Companies Act, 2013, or any person holding, directly or indirectly, more than 10% of the shareholding.

That second limb catches people who have never thought of themselves as promoters. In a closely held company, an investor sitting on 11% is inside the definition whether or not any filing describes them that way.

What this looks like in numbers

An unlisted company buys back shares for 50 lakh rupees. The shareholder acquired them three years ago for 10 lakh rupees, so the gain is 40 lakh rupees and, the shares being unlisted and held beyond 24 months, it is long-term.

• Non-promoter shareholder: long-term capital gains at 12.5% on 40 lakh rupees, plus surcharge (capped at 15% on capital gains) and cess, roughly 5.98 lakh rupees.
• Promoter shareholder: the same 5.98 lakh rupees, plus additional income-tax at 17.5% on 40 lakh rupees (7 lakh rupees), plus 12% surcharge and cess on that, roughly 14.13 lakh rupees in total.
• Under the regime that applied until 31 March 2026: the full 50 lakh rupees would have been taxed as dividend at slab rates, around 17.94 lakh rupees at the top rate, with the 10 lakh rupees cost recoverable only as a capital loss against future capital gains.

So the change is a material saving for ordinary shareholders and a smaller one even for promoters. The headline 22% and 30% figures are base rates, the actual outgo is higher once surcharge and cess are layered on.

Points that come up in practice

The stranded capital loss problem is gone. Under the previous regime the cost of the extinguished shares became a capital loss many shareholders could never use, because they had no other capital gains to set it against. From 1 April 2026 the cost is simply deducted in computing the gain.

Employees exiting through an ESOP buyback face two separate tax events. Perquisite tax arose at exercise, on the difference between fair market value and the exercise price. The buyback is a second, separate capital gains event. The cost of acquisition for that second event is the value already taxed as a perquisite, not the exercise price paid, so the same amount is not taxed twice.

Advance tax timing. Capital gains are hard to estimate in advance, and there is relief from interest where a shortfall arises from capital gains, provided the whole tax on that gain is paid in the remaining instalments or by 31 March. A buyback that completes in March leaves very little room, so the payment date matters for cash planning as well as for which regime applies.

Non-resident shareholders should check the treaty position before assuming the domestic rate applies. Several treaties restrict India’s right to tax capital gains on shares, and where the treaty is more favourable it can be claimed with a Tax Residency Certificate and the prescribed declaration.

The company’s own position. From 1 April 2026 the company pays no distribution tax on a buyback, the entire incidence sits with the shareholder. The company’s obligations are the Companies Act procedure and, where applicable, withholding. The procedural side is covered in Share Buyback Procedure.