Buyback of Shares: Tax Implications for Companies & Shareholders

Buyback taxation has now changed twice in about 18 months. Before October 2024, the company absorbed the tax cost under Section 115QA and the shareholder received proceeds tax-free. From October 2024 to March 2026, that flipped: the company paid nothing, and the shareholder was taxed on the full proceeds as deemed dividend. From April 1, 2026, it has changed again: buyback proceeds are back to a capital-gains framework for ordinary shareholders, with a new tax specifically targeting promoters layered on top. Both companies planning a buyback and shareholders participating in one need the current mechanics, not last year's, before assuming any figure still applies.

The Current Rule: Capital Gains Treatment from April 1, 2026

For buybacks undertaken on or after April 1, 2026, buyback proceeds are taxed as capital gains under Section 69 of the Income Tax Act 2025, not as deemed dividend. The shareholder is taxed only on the difference between the buyback price and their cost of acquisition, using the normal LTCG/STCG framework: 12.5% for long-term gains (with the same ₹1.25 lakh annual exemption available to listed equity LTCG generally), and 20% for short-term gains on listed shares (the applicable rate for unlisted shares). Section 115QA, the old company-level buyback tax, remains repealed; it is not reinstated as part of this change.

Layered on top of this, a new Special Additional Tax applies specifically to promoters participating in a buyback, at an effective combined rate of roughly 22% for corporate promoters and roughly 30% for non-corporate promoters. We were not able to independently confirm the exact shareholding percentage or condition that triggers this promoter-specific tax from the sources available at the time of writing, so treat the existence and approximate rate as confirmed, but the precise triggering mechanics as something to verify with a CA before a buyback involving promoter participation is finalised.

The TDS mechanism applicable to this capital-gains treatment was also not something we could independently confirm with confidence; whether TDS continues under Section 194 (the dividend TDS provision used under the Oct 2024-Mar 2026 regime) or shifts to a different withholding section has not been consistently reported across sources. Confirm this specifically with your CA before a buyback closes.

The Regime This Replaced: Deemed Dividend (Oct 1, 2024 to Mar 31, 2026)

The rest of this section describes the rules that applied to buybacks undertaken between October 1, 2024 and March 31, 2026, kept here for reference since some ongoing disputes, refunds, or historical filings may still turn on this period's treatment. If you are planning a buyback now, the current rule above is what applies, not this section.

What Changed on October 1, 2024

Before this date, a company undertaking a buyback paid tax under Section 115QA at an effective rate of roughly 23.3% (inclusive of applicable surcharge and cess) on the distributed income, essentially the difference between the buyback price and the amount originally received by the company for those shares. The shareholder receiving buyback proceeds paid no further tax on that amount, since it was exempt under a corresponding provision.

For buybacks from October 1, 2024 onward, Section 115QA no longer applies at the company level. Instead, a new limb was added to Section 2(22)(f) bringing the entire sum received by a shareholder on a buyback within the definition of "dividend." The practical result: the company no longer bears a buyback tax, but the shareholder now pays tax on the full proceeds as deemed dividend, at their own applicable slab rate, with no offset for the amount they originally paid for the shares at the time the dividend income is computed.

How the Shareholder Was Taxed Under This Regime

The full buyback amount received by the shareholder was treated as deemed dividend income and taxed at their applicable slab rate (or the relevant treaty rate, for non-resident shareholders), the same way ordinary dividend income is taxed after the abolition of DDT. For a shareholder in a high tax bracket, this meant a substantially higher effective tax cost on the buyback proceeds than a flat company-level buyback tax used to produce, particularly compared to the pre-October 2024 regime where the shareholder paid nothing directly.

This mirrored the shareholder-level taxation approach in place for ordinary dividends since DDT was abolished; see our companion guide on dividend distribution and taxation for how that works for a regular payout.

The Capital Loss Mechanic Under Section 46A (Oct 2024-Mar 2026 Buybacks)

Here is the part that often got missed: because the buyback consideration was taxed entirely as deemed dividend, what happened to the shareholder's original cost of acquiring those shares? Under the amended Section 46A, the sale consideration used to compute capital gains on the buyback was deemed to be nil. Since the shareholder received no capital gains credit for the buyback amount (it had already been taxed as dividend), the entire cost of acquisition of the shares surrendered in the buyback effectively became a capital loss.

Whether this loss was short-term or long-term depended on how long the shareholder held the shares before the buyback. That capital loss could be set off against other capital gains in the same year under the normal set-off rules (long-term loss only against long-term gains; short-term loss against either), and any unabsorbed loss can still be carried forward for up to 8 assessment years from the year it arose. This mechanic no longer applies to buybacks from April 1, 2026 onward, since those are directly taxed as capital gains rather than as dividend plus a separate loss.

TDS on Buyback Proceeds Under This Regime

Because buyback proceeds were classified as deemed dividend under this regime, the same withholding mechanism applied as for an ordinary dividend payout: TDS under Section 194 for resident shareholders once the prescribed annual threshold was crossed, at the standard rate applicable to dividend income, and TDS under Section 195 for non-resident shareholders. As noted above, whether this carries over unchanged to buybacks from April 1, 2026 has not been confirmed; do not assume it does.

What This Means for Companies Planning a Buyback Now

With the shift back to capital-gains treatment from April 1, 2026, a buyback is closer to being a genuinely tax-efficient route for ordinary shareholders again, since only the gain is taxed rather than the full proceeds. But this no longer applies uniformly: promoters face the new Special Additional Tax on top of the capital-gains number, and the exact trigger for that tax needs confirming case by case. Companies should model the after-tax outcome separately for promoter and non-promoter shareholders, factoring in each shareholder's holding period and whether the promoter-specific tax applies to their participation, rather than assuming either the old deemed-dividend numbers or a blanket capital-gains rate for everyone. For closely held companies weighing a buyback as part of a broader promoter exit or capital restructuring, this is worth modelling alongside our guidance on startup valuation and cap table planning.