Buyback of shares is one of the primary ways Indian companies return capital to shareholders. It reduces the share count, supports the stock price, and (depending on the prevailing tax regime) can be more tax-efficient than paying dividends. But the tax treatment has changed dramatically three times in under two years, making it essential for both companies and shareholders to understand exactly which regime applies to their transaction.
This guide traces the complete arc: the company-level buyback distribution tax that applied until September 2024, the widely criticised deemed-dividend regime that followed, and the capital gains framework restored by the Finance Act 2026. It covers computation mechanics, cost of acquisition rules, ITR reporting, and practical planning considerations.
What Is a Buyback of Shares?
A buyback (also called a share repurchase) is a corporate action where a company purchases its own shares from existing shareholders. The shares bought back are extinguished; they cease to exist. The shareholder receives cash in exchange for surrendering the shares.
Companies buy back shares for several reasons:
- Returning surplus cash to shareholders without paying a dividend
- Improving financial ratios such as earnings per share (EPS) and return on equity (ROE)
- Signalling confidence that the market price is below intrinsic value
- Preventing dilution after large ESOP exercises
- Consolidating promoter holding when public shareholders tender
Under the Companies Act 2013 (Sections 68 to 70), a company can buy back shares only from free reserves, the securities premium account, or the proceeds of an earlier share issue. The buyback cannot exceed 25% of the aggregate paid-up capital and free reserves. A special resolution is required unless the buyback is within 10% of net worth, in which case a board resolution suffices. The company cannot issue the same class of shares within six months of completing the buyback (with limited exceptions).
For listed companies, SEBI's Buyback of Securities Regulations, 2018 (as amended) prescribe the mechanics: the tender offer route, the open market route (which SEBI suspended in 2023 and has proposed to restore), pricing floors, escrow requirements, and timelines.
The Three Tax Regimes: A Timeline
The tax treatment of buyback has moved through three phases. Understanding which regime applies is the first step in computing the tax liability.
The date that matters is the date of payment by the company to the shareholder (for BDT) or the date of transfer (for capital gains). Shareholders who tendered shares under a buyback offer that straddled regime boundaries need to check the actual payment or transfer date to identify the applicable regime.
Regime 1: Company-Level BDT Under Section 115QA (Before 1 October 2024)
How It Worked
Section 115QA was introduced by the Finance (No. 2) Act 2013, effective 1 June 2013, initially for unlisted companies only. The Finance Act 2019 extended it to listed companies from 5 July 2019.
Under this regime, the company paid a buyback distribution tax at the rate of 20% (plus surcharge and cess, effective rate approximately 23.296%) on the "distributed income."
Distributed income was defined as:
Consideration paid by the company on buyback minus the amount received by the company for issuance of those shares.
In other words:
Distributed income = Buyback price paid to shareholder - Amount received by the company when the shares were originally issued
The "amount received on issuance" broadly meant the issue price. For shares allotted through subscription, it was the subscription price. For bonus shares, the numerator of the cost was zero because the company received nothing on issuance of bonus shares. This made the entire buyback price taxable as distributed income.
Shareholder's Position
The shareholder received the buyback proceeds entirely exempt under Section 10 34A). No income tax was payable by the individual, HUF, or institutional investor receiving the cash. The tax burden sat with the company.
Why This Mattered
The 115QA regime was broadly considered efficient for shareholders. A company buying back shares at Rs 500 per share (issued at Rs 100) paid BDT on the Rs 400 difference per share. The shareholder walked away with Rs 500 tax-free. For shareholders in the 30% slab, this was a better outcome than receiving a taxable dividend.
Example Under Regime 1
Meera holds 1,000 shares of Zenith Ltd (listed company) purchased at Rs 200 each. The company announces a buyback at Rs 450 per share. The shares were originally issued by Zenith at Rs 50 per share.
Company's BDT computation:
Meera's tax: Rs 0 (exempt under Section 10 34A)).
Meera receives Rs 4,50,000 1,000 x Rs 450) in her bank account. The company bears the tax cost separately.
Regime 2: Deemed Dividend Treatment 1 October 2024 to 31 March 2026)
The Shift
The Finance (No. 2) Act 2024 abolished Section 115QA with effect from 1 October 2024. The stated rationale was to align buyback taxation with dividend taxation. But the implementation created a regime that was widely considered harsher than either the old BDT system or a dividend.
Under this regime, buyback proceeds received by a shareholder were treated as "deemed dividend" under Section 2 22). The entire buyback consideration (not just the gain over cost) was classified as dividend income in the shareholder's hands.
The Harshness: No Cost Deduction
The critical pain point was that no deduction was allowed for the cost of acquisition. If a shareholder had purchased shares at Rs 200 and tendered them in a buyback at Rs 250, the entire Rs 250 per share was taxed as dividend income, not just the Rs 50 gain.
This meant that shareholders were effectively paying tax on a return of their own capital, not just on the profit. For long-term shareholders who had purchased at prices close to or even above the buyback price, this produced absurd results: tax on a transaction that generated no economic gain, or even produced a loss.
Tax Rate
As deemed dividend income, the buyback proceeds were taxed at the shareholder's applicable slab rate. For individuals in the highest bracket under the new tax regime, this meant 30% plus surcharge and cess on the entire consideration.
Industry Criticism
The October 2024 to March 2026 regime attracted substantial criticism from tax professionals, institutional investors, and industry bodies. The complaints centred on:
- Double taxation of capital: shareholders were taxed on return of their own investment, not just profit
- No cost step-up: even inflation-adjusted cost was unavailable
- Higher effective rate than dividends: a shareholder who bought at Rs 450 and sold in buyback at Rs 450 (zero gain) still paid tax on the full Rs 450 as dividend
- Discouragement of buyback: companies shifted back to dividends, which at least had a lower effective tax for some shareholder classes
- Retrospective impact: shareholders who planned positions around the earlier 115QA regime found the rules changed on them
Example Under Regime 2
Continuing the earlier example: Meera holds 1,000 shares of Zenith Ltd purchased at Rs 200 each. The company announces a buyback at Rs 450 per share during November 2024.
Meera's tax computation:
Compare this with Regime 1 where Meera paid Rs 0 in tax. The company no longer pays any BDT. The entire burden has shifted to the shareholder, and the base for taxation is the gross consideration, not the gain.
If Meera had purchased the shares at Rs 450 (zero gain), she would still owe approximately Rs 1,43,424 in tax. This is the feature that made the regime untenable.
Cost of Acquisition: A Partial Fix
The Finance (No. 2) Act 2024 did attempt to address the cost issue for future capital gains computation. Where shares had been bought back and tax was paid as deemed dividend without cost deduction, the cost of acquisition of those shares could be treated as a capital loss in the shareholder's hands in certain situations. However, this partial fix was complex, did not fully offset the harm, and applied prospectively.
Regime 3: Capital Gains Treatment (From 1 April 2026)
The Finance Act 2026 Correction
Recognising the unfairness of the deemed dividend regime, the Finance Act 2026 restored capital gains treatment for buyback of shares with effect from 1 April 2026. This is the regime that now applies to all buybacks where the transfer occurs on or after that date.
Under the new framework:
- The buyback is treated as a transfer of shares by the shareholder to the company
- The shareholder files capital gains as: Sale Consideration (buyback price) minus Cost of Acquisition
- The gain is classified as STCG or LTCG depending on the holding period
- The company pays no buyback distribution tax
Section 115QA is effectively a dead provision for any buyback from April 2026 onwards. It remains on the statute book for historical assessments (buybacks that took place before October 2024), but has no prospective application.
Tax Rates Under the April 2026 Regime
The capital gains rates applicable to buyback proceeds from 1 April 2026 are the same rates that apply to any sale of shares:
Listed Shares (on a recognised stock exchange)
Unlisted Shares
Note: For unlisted shares, the holding period threshold for LTCG is 24 months, not 12 months. The LTCG rate of 12.5% applies without the Rs 1.25 lakh annual exemption (that exemption is specific to Section 112A, which covers listed equity and equity-oriented mutual fund units).
Cost of Acquisition Rules
The cost of acquisition for computing capital gains on buyback follows the standard rules:
Shares acquired through purchase or subscription: The actual price paid (including brokerage and other acquisition costs).
Bonus shares: For bonus shares allotted on or after 1 April 2001, the cost of acquisition is nil. For bonus shares allotted before 1 April 2001, the fair market value as on 1 April 2001 can be considered. This means the entire buyback consideration for bonus shares is taxable as capital gain.
Shares received through demerger: The cost of acquisition of the original shares in the demerged company is apportioned between the resulting company and the demerged company in the ratio of net book values of assets transferred to the resulting company and those retained by the demerged company, as on the date of demerger.
Shares received through amalgamation: The cost of acquisition of shares in the amalgamating company becomes the cost of shares in the amalgamated company. No fresh cost arises on the swap; the original purchase price carries forward.
Shares acquired through ESOP: The cost of acquisition is the amount on which perquisite tax under Section 17 2) was paid (i.e., the FMV on allotment minus the exercise price, added to the exercise price). In practice, this is the FMV on the date of exercise as reported by the employer.
Shares acquired before 1 February 2018 (grandfathering for listed shares under 112A): For LTCG computation under Section 112A, the cost of acquisition is the higher of (a) actual cost or (b) the lower of (FMV as on 31 January 2018, and the full value of consideration). This grandfathering provision ensures that gains accrued up to 31 January 2018 are not taxed.
Holding Period: When Does It Start?
The holding period starts from the date of acquisition (purchase date, allotment date for bonus/ESOP, date of demerger order for demerger shares) and ends on the date of transfer. For a buyback, the date of transfer is generally the date on which the shares are extinguished and the consideration becomes payable.
For tender offer buybacks, this is typically the date specified by the company as the record date for acceptance of shares or the date of extinguishment of shares, not the date the shareholder submitted the tender form.
Example Under Regime 3
Meera holds 1,000 shares of Zenith Ltd (listed, held for 18 months) purchased at Rs 200 each. The company announces a buyback at Rs 450 per share, with transfer date in July 2026.
Meera's capital gains computation:
Compare this across all three regimes:
The April 2026 regime is clearly the most favourable for shareholders who purchased at a meaningful cost. The cost deduction and the concessional 12.5% LTCG rate (with the Rs 1.25 lakh exemption) dramatically reduce the effective tax.
Side-by-Side Comparison of All Three Regimes
Open Market Buyback Through Stock Exchange
For listed companies, SEBI regulations prescribe two routes for buyback:
-
Tender offer route: The company makes an offer to all shareholders to tender shares at a specified price. This is the standard route and has been available throughout.
-
Open market route: The company buys shares on the stock exchange through the secondary market over a period of time (up to six months). SEBI suspended open market buybacks in 2023 after concerns about price manipulation and insider trading. As of mid-2026, SEBI has proposed to reintroduce the open market route with enhanced safeguards, including a mandatory pre-announcement window, restrictions on promoter participation, and real-time disclosure of daily buyback volumes.
From a tax perspective, the treatment is the same regardless of the route. A shareholder selling shares to the company through an open market buyback would compute capital gains based on the actual sale price and cost of acquisition. The key difference is that in an open market buyback, the shareholder may not even know they are selling to the company; the transaction looks like a normal secondary market sale.
Treatment of Buyback Losses
Under Regime 3, if the buyback price is lower than the cost of acquisition (the shareholder is exiting at a loss), the shareholder can claim a capital loss.
- A short-term capital loss can be set off against any capital gain (short-term or long-term) in the same year, and carried forward for 8 assessment years
- A long-term capital loss can be set off only against long-term capital gains in the same year, and carried forward for 8 assessment years
This is a significant improvement over Regime 2, where losses were simply invisible because the entire consideration was taxed as dividend (there was no cost to subtract, so the concept of loss did not arise).
Buyback of Unlisted Company Shares: Special Considerations
For private limited companies and unlisted public companies, buyback is governed purely by Sections 68 to 70 of the Companies Act 2013 (SEBI regulations do not apply to unlisted companies).
Key differences for unlisted share buybacks:
Holding period for LTCG: 24 months (not 12 months as for listed shares). Shares held for 24 months or less generate STCG taxable at the shareholder's slab rate.
Fair market value considerations: In private company buybacks, the buyback price is often negotiated rather than market-determined. If the buyback price exceeds fair market value, the excess could be treated as a benefit or perquisite in certain cases, though this is more relevant for tax avoidance scrutiny than for straightforward buybacks.
Section 56 2)(x) implications: If shares are bought back at a price significantly below FMV from the shareholder's perspective, there may be gift tax implications under Section 56 2)(x) for the company (receiving property below adequate consideration). This is a niche issue but relevant for family-held companies.
TDS: For unlisted companies, the company must deduct TDS on the capital gains element if required under the applicable TDS provisions. For listed shares transacted through a stock exchange, STT is levied and TDS is generally not applicable.
ITR Reporting: Schedule CG for Buyback from April 2026
For buybacks occurring from 1 April 2026, shareholders must report the capital gains in Schedule CG (Capital Gains) of their Income Tax Return.
Which ITR form?
- ITR 2: Individuals and HUFs with capital gains but no business income
- ITR 3: Individuals and HUFs with business income
- ITR 5: Firms, LLPs, and AOPs
- ITR 6: Companies
How to report in Schedule CG:
For listed shares (LTCG under Section 112A):
- Go to Schedule CG, Section B (Long-Term Capital Gains)
- Under "From sale of equity shares or units of equity-oriented mutual fund on which STT is paid," enter the sale consideration (buyback price), cost of acquisition, and compute the gain
- Apply the Rs 1.25 lakh exemption if not already exhausted by other 112A transactions during the year
For listed shares (STCG under Section 111A):
- Go to Schedule CG, Section A (Short-Term Capital Gains)
- Under "On which STT is paid," enter the computation
For unlisted shares:
- Report under the appropriate LTCG or STCG section depending on the holding period
- Unlisted share gains do not qualify for the Rs 1.25 lakh exemption under Section 112A
Shareholders should retain the following documents:
- Purchase contract notes or allotment letters (for cost of acquisition)
- Buyback offer letter and acceptance confirmation
- Bank statement showing receipt of buyback consideration
- Demat statement showing shares debited
- Form 10BA or equivalent if the company issued one
Practical Planning Considerations
For Shareholders
Timing of participation: If you hold listed shares with significant unrealised gains and a buyback is announced, the April 2026 regime is considerably more tax-efficient than the October 2024 to March 2026 deemed dividend regime. Shareholders who deferred participation from late 2024 or 2025 to April 2026 or later will benefit from capital gains treatment.
LTCG vs STCG: The difference between 12.5% LTCG (with the Rs 1.25 lakh exemption) and 20% STCG for listed shares is material. If you are close to the 12-month holding period, evaluate whether waiting is worthwhile.
Tax loss harvesting: If you hold other shares at a loss, you can time the sale to offset the LTCG or STCG from the buyback. Capital losses carry forward for 8 years if not fully absorbed in the current year.
Grandfathering benefit for pre-2018 acquisitions: If your listed shares were acquired before 1 February 2018, your cost of acquisition for Section 112A is stepped up to the FMV as on 31 January 2018 (subject to the lower of FMV and sale consideration rule). This can significantly reduce the taxable LTCG.
For Companies
No BDT liability from April 2026: The company no longer bears any tax cost on buyback. This simplifies the cost-benefit analysis between buyback and dividend as return-of-capital mechanisms.
Buyback vs dividend decision: With buyback now taxed as capital gains in the shareholder's hands and dividends taxed as income at slab rates, buyback is more tax-efficient for shareholders in higher tax brackets. Companies may increasingly prefer buybacks over special dividends.
Compliance with Companies Act: The buyback must still satisfy all Companies Act and SEBI requirements: 25% cap, sources of funds (free reserves, securities premium, or proceeds of earlier issue), special resolution (unless within 10% board resolution limit), filing of return of buyback with ROC, and the prohibition on share issuance of the same class for six months post-buyback.
Frequently Asked Questions
Is Section 115QA still applicable?
Section 115QA is technically still part of the statute for historical assessments. If a company completed a buyback and paid BDT before October 2024, that assessment continues under the old rules. For any buyback from 1 April 2026, Section 115QA has no application. The transitional period (October 2024 to March 2026) was governed by the deemed dividend provisions.
What happens if I bought shares specifically for a buyback?
There is no anti-avoidance rule that specifically disallows capital gains treatment simply because you purchased shares knowing a buyback was coming. However, if the transaction lacks commercial substance or is structured solely for tax benefits, the General Anti-Avoidance Rules (GAAR) under Chapter X-A could theoretically be invoked. In practice, GAAR has been used sparingly, and participating in a publicly announced buyback is a normal commercial transaction.
Can I claim indexation on the cost of acquisition?
The Finance Act 2024 removed the indexation benefit for all asset classes (including unlisted shares) with effect from 23 July 2024. For buybacks from 1 April 2026, no indexation is available on the cost of acquisition. The cost is taken at actual purchase price (or deemed cost for bonus shares, demerger shares, etc.) without any inflation adjustment.
How is TDS handled on buyback?
For listed shares bought back through a recognised stock exchange, Securities Transaction Tax (STT) is paid and TDS is generally not deducted. For unlisted company buybacks or off-market transactions, the company may need to deduct TDS under Section 194 (as applicable to capital gains). The specific TDS rate and threshold depend on the nature of the shareholder and the transaction structure.
What if the buyback was announced before April 2026 but payment is made after April 2026?
The applicable regime depends on the date of transfer (when shares are extinguished and consideration becomes payable), not the date of announcement. If the company announces the buyback in March 2026 but the shares are transferred and payment is made in April 2026 or later, the capital gains regime (Regime 3) applies.
Is STT paid on buyback through tender offer?
Yes. For listed companies, STT is applicable on buyback of shares through the tender offer route. The company (as the buyer) pays STT at the applicable rate on the value of shares bought back. The payment of STT is relevant because it qualifies the transaction for the concessional LTCG rate of 12.5% under Section 112A and the STCG rate of 20% under Section 111A.
Source Attribution
This guide draws on: Section 115QA of the Income Tax Act, 1961 (as it stood prior to abolition); Section 2 22) of the Income Tax Act (definition of deemed dividend); Section 10 34A) (exemption for shareholder under the old BDT regime); Finance (No. 2) Act 2024 (abolition of Section 115QA, insertion of deemed dividend treatment for buyback); Finance Act 2026 (restoration of capital gains treatment from 1 April 2026); Sections 111A, 112A, and 112 of the Income Tax Act (STCG and LTCG rates); Sections 68 to 70 of the Companies Act 2013 (buyback mechanics and regulatory requirements); SEBI (Buyback of Securities) Regulations, 2018; CBDT circulars on grandfathering provisions under Section 112A; and the official Income Tax Department e-filing portal at incometax.gov.in. All rates and thresholds are current as of FY 2026-27 / AY 2027-28.
