Buyback tax: How India changed the rules three times in 18 months and what investors need to know

Share buybacks have undergone three different tax treatments in just 18 months, with the latest framework bringing them back under the capital gains regime while introducing an additional tax burden for promoters.

A share buyback is a process through which a company purchases its own shares from existing shareholders. Companies can undertake buybacks through the open market, tender offers or book-building mechanisms. For companies, buybacks offer a way to return surplus cash to shareholders and can also improve earnings per share by reducing the number of outstanding shares.

For investors, however, the tax treatment of the transaction has changed sharply in a short period.

From company-level tax to shareholder-level taxation

Before October 2024, companies undertaking buybacks were liable to pay a buyback tax under Section 115QA of the Income-tax Act, 1961. The effective tax rate was about 23.296%, including surcharge and cess. Income arising from the buyback was broadly exempt in the hands of shareholders.

The framework changed from October 1, 2024, when the buyback tax was abolished and the entire consideration received by a shareholder was treated as deemed dividend under Section 2(22)(f) of the Income-tax Act.

This created a significant tax distortion for investors because the entire buyback consideration was taxable as dividend income, without allowing a deduction for the acquisition cost of the shares, according to experts. The cost of acquisition was instead recognised separately as a capital loss.

For example, if a shareholder received ₹50 lakh from a buyback for shares originally acquired for ₹10 lakh, the entire ₹50 lakh was treated as deemed dividend, while the ₹10 lakh acquisition cost was dealt with separately as a capital loss.

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April 2026 brings another reversal

The Income-tax Act, 2025, effective from April 1, 2026, has moved buybacks back into the capital gains framework.

Under Section 69(1)(2), the taxable capital gain is broadly calculated as the buyback consideration minus the cost of acquisition. This brings the tax treatment closer to the economic nature of the transaction, since shareholders effectively sell their shares back to the company.

For listed shares, non-promoter shareholders could face 12.5% long-term capital gains tax or 20% short-term capital gains tax, subject to applicable conditions.

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The new framework, however, separately imposes an additional tax on specified promoters. The effective burden could be around 22% for corporate promoters and 30% for non-corporate promoters, including applicable surcharge and cess.

The changes highlight how dramatically the tax characterisation of buybacks has shifted—from a company-level levy, to deemed dividend taxation, and now back to capital gains.

For investors and companies considering buybacks, the timing of the transaction can therefore have a material impact on the final tax outcome.

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