Income Tax Rules on Buyback of Shares for Retail Investors

Indian tax laws are dynamic, and staying updated is essential not only to remain compliant but also to maximise investment returns. In recent years, there have been significant changes in the income tax on buyback of shares, directly affecting the tax liability of retail investors. This article explains the latest income tax rules on buybacks and what they mean for shareholders. 

Meaning of buyback of shares

A buyback of shares refers to the corporate practice where a company repurchases its own shares from existing shareholders, usually at a premium price as compared to the prevailing market price. Once the shares are bought back, they are extinguished. This reduces the company’s outstanding share capital and can enhance the value of the remaining shares.

Companies can buy back shares through the following methods: 

• Tender offer: Companies offer to repurchase shares at a fixed price within a specific time window. Interested shareholders can tender their shares at this price.
• Book-building method: This method is applicable only to listed companies. Shareholders place bids within a price range. Shares are bought at the price discovered based on demand.
• Open market buyback: Earlier, companies could buy shares actively from sellers on the stock exchange. However, the Securities and Exchange Board of India (SEBI) discontinued this option for companies with effect from April 1, 2025. 

Reason for buyback of shares

Companies buy back shares for several financial and strategic reasons, including: 

1. Improving financial ratios: Return on Equity (ROE) measures profitability and is calculated by dividing net income by shareholders’ equity. When a company’s equity base reduces after a buyback, its Earnings Per Share (EPS) and ROE may increase, even if overall profits remain the same.
2. Making efficient use of excessive cash: Companies raise capital through shares to expand their business. However, when growth opportunities are limited, instead of keeping surplus cash idle, they may return it to shareholders through buybacks as a strategic decision.
3. Signalling confidence: A buyback signals that management believes that the company’s shares are undervalued and expects their price to rise. 
4. Increasing shareholder value: By improving financial metrics and reducing share supply, buybacks can potentially enhance shareholder value. 

Taxation of buyback of shares

Section 115QA of the Income Tax Act governed the taxation of buybacks by domestic companies until September 30, 2024. During this period, domestic companies buying back their shares were required to pay a flat 20% tax on distributed income, along with a 12% surcharge and 4% health and education cess, resulting in an effective tax rate of 23.296%. 

Distributed income refers to the difference between the buyback price and the issue price of the shares. Income arising from such buybacks was exempt in the hands of shareholders under Section 10(34A).

Following the changes introduced in Budget 2024, the tax treatment of buybacks has been revised. With effect from October 1, 2024, companies are no longer liable to pay tax under Section 115QA. Instead, the tax burden shifts to the shareholder. 

Under the newly inserted provision of Section 2(22)(f), the amount received by shareholders on buyback of shares is treated as a deemed dividend and taxed in their hands as income from other sources, at the applicable tax rates. 

New Buyback Tax Rules After Budget 2026 (Effective 1 April 2026)

From April 1, 2026 (FY 2026‑27), share buybacks will no longer be taxed as ‘deemed dividend’ in the hands of investors. Instead, buyback consideration will be taxed under the Capital Gains head, and shareholders will pay tax only on their actual gains, i.e. the difference between the buyback price and their cost of acquisition.

For non‑promoter investors, long‑term capital gains (LTCG) on equity shares are taxed at 12.5%, subject to the applicable exemption limit on listed equity gains, while short‑term capital gains (STCG) on listed shares are taxed at 20% (STCG on unlisted shares continues to be taxed at applicable rates).

To curb tax‑driven buybacks by controlling shareholders, Union Budget 2026 also introduced an additional buyback tax for promoters, resulting in an effective tax rate of about 22% on buyback gains for domestic‑company promoters and 30% for non‑corporate & other promoters.

Additional income‑tax on gains from share buyback, applicable only to promoters (as defined under SEBI/Companies Act).

Claiming capital loss under Section 46A

Although buyback proceeds are taxed as dividend income, the Income Tax Act provides partial relief through Section 46A. Under this provision, the cost of acquisition of the shares tendered in a buyback is deemed to be nil, resulting in a capital loss. 

Such a loss can be set off against capital gains in the same assessment year and may also be carried forward up to eight assessment years, subject to the prevailing set-off and carry-forward rules. 

From 1 April 2026, buybacks are proposed to be taxed directly under the capital‑gains head again, so the exact role of Section 46A will change. Investors will then pay tax only on the actual gain (buyback price minus cost), and loss set‑off will work more straightforwardly.

Tender offer buyback vs. book-building method

When it comes to buybacks, retail investors generally have two options: tender their shares or participate through the book-building method. Understanding the differences helps in making informed decisions. 

Conclusion

Buyback of shares offers a structured exit opportunity for shareholders. But recent amendments have made it essential for retail investors to carefully assess the tax implications of buybacks. Earlier, the tax incidence was borne by the company, indirectly impacting remaining shareholders. However, now the liability shifts to shareholders receiving the buyback proceeds. Understanding the meaning of buy back of shares, the reason for buy back of shares, and the revised tax rules is essential for effective long-term tax planning and optimising post-tax returns.