Share Buyback Tax in India 2026: Capital Gains vs. Deemed Dividend — What Changed?

Share buyback taxation in India has undergone a complete overhaul — from a company-level levy under Section 115QA to shareholder-level capital gains under the new Income-tax Act, 2025. Here is what changed, who is affected, and how to plan around it.

Every CFO in India knows that returning cash to shareholders is partly a tax decision. What many boards and advisors have not yet internalised is that the tax equation on share buybacks shifted sharply on October 1, 2024 — and has shifted again from April 1, 2026. This article maps the complete journey of share buyback taxation in India: from the old Section 115QA regime to the interim deemed dividend window, and finally to the capital gains framework now in force under the new Income-tax Act, 2025. Read it to understand exactly where you stand and how to plan.

Key Definitions Under Relevant Laws

Share Buyback (Share Repurchase) — The process by which a company purchases its own shares from existing shareholders, governed by Sections 68 to 70 of the Companies Act, 2013. Buybacks reduce paid-up share capital and return surplus cash without a formal dividend declaration.

Distributed Income — Defined under Section 115QA of the Income-tax Act, 1961 (operative until September 30, 2024) as the consideration paid by the company on buyback of shares minus the amount received by the company at the time of issue of those shares. This was the taxable base for the company-level buyback tax.

Deemed Dividend — Under Section 2(22) of the Income-tax Act, 1961, certain payments by a company are treated as dividend even when not formally declared as such. Section 2(22)(f), inserted with effect from October 1, 2024, brought within this definition any amount paid by a domestic company to a shareholder on buyback of its own shares.

Capital Asset — Defined under Section 2(14) of the Income-tax Act, 1961 as property of any kind held by an assessee, whether or not connected with business. Equity shares held as investments qualify as capital assets, and gains on their transfer are subject to capital gains tax under Section 45.

Section 46A — A specific provision of the Income-tax Act, 1961 that treats the purchase of its own shares by a company as a “transfer” in the hands of the shareholder, enabling computation of capital gains on the difference between buyback consideration received and the original cost of acquisition.

Long-Term Capital Asset — For listed equity shares, a capital asset held for more than 12 months prior to transfer. Gains on transfer of long-term equity capital assets attract LTCG tax at 12.5% without indexation under the current regime.

Why Has Share Buyback Taxation in India Changed Three Times in Two Years?

A quick comparison frames the stakes. Until September 2024, a share buyback in India was a textbook illustration of tax-efficient capital return. The company absorbed a uniform 23.296% tax (20% rate plus 12% surcharge and 4% cess) on the distributed income at the entity level under Section 115QA, and shareholders received the entire buyback consideration free of tax under Section 10(34A). For promoters, institutions, and HNIs in the 30% bracket, this was decisively better than a dividend. 

Two legislative events dismantled this architecture in quick succession. The Finance (No. 2) Act, 2024, effective October 1, 2024, abolished Section 115QA on the stated ground that the buyback route was being systematically used to circumvent dividend taxation by high-bracket shareholders. The move shifted the tax burden to shareholders but left open a critical question: would buyback proceeds be capital gains or deemed dividend? Parliament answered — briefly — by treating them as deemed dividend under Section 2(22)(f). The new Income-tax Act, 2025, which came into force on April 1, 2026 as part of India’s complete tax law recodification, has now settled the matter as capital gains in shareholder hands.

Each of these three regimes carries a distinct rate, a distinct compliance structure, and a distinct planning implication. Understanding the full arc is essential — not merely to know today’s rule, but to correctly assess past buyback transactions and structure future ones.

What Was the Section 115QA Regime and How Did It Work?

Before October 1, 2024, the taxation of share buybacks operated entirely at the company level. The shareholder played no tax role whatsoever.

The mechanics of the old regime:

1. A domestic company announces a buyback at a price above the original issue price of the shares.
2. The company computes “distributed income” = Buyback consideration paid per share − Amount received per share at original issue.
3. The company pays Distributed Income Tax at 20% plus applicable surcharge plus 4% health and education cess on the total distributed income.
4. Shareholders receive buyback proceeds fully exempt from tax under Section 10(34A) of the Income-tax Act, 1961.
5. Critically, the shareholder could not claim the cost of acquisition of tendered shares as a capital loss. Section 10(34A) exempted the proceeds, leaving no deductible base.

Why it was the preferred capital return route: For shareholders in the 30% slab — promoters, foreign portfolio investors in high-tax jurisdictions, and domestic institutions — receiving buyback proceeds exempt from tax while the company bore a flat ~23% was economically superior to dividends taxable at their marginal rate. SEBI data for FY 2022–23 and FY 2023–24 confirmed a dramatic surge in corporate buyback announcements during this period, almost entirely driven by the tax differential.

The structural flaw that led to its abolition: Shareholders with a low acquisition cost were effectively receiving most of the buyback value tax-free, while the company — and by extension all shareholders including those not participating — bore the Section 115QA tax. The Finance Ministry concluded this was a transfer pricing-adjacent distortion, and the Finance (No. 2) Act, 2024 removed it entirely.

What Is the Deemed Dividend Treatment of Buyback Proceeds (October 2024 – March 2026)?

For an 18-month transitional period — October 1, 2024 through March 31, 2026 — buyback proceeds received by shareholders fell under the deemed dividend category by virtue of Section 2(22)(f) of the Income-tax Act, 1961.

Under this framework, the entire consideration received in buyback was taxable as dividend income at the shareholder’s applicable income tax slab rate. For an individual in the 30% bracket, the effective rate including surcharge and cess could reach 35.88% or higher. The company paid no tax; the shareholder bore the full burden.

Two aspects of this interim regime created significant hardship and legal debate. First, there was no deduction for cost of acquisition under the dividend income head — the gross consideration received was the taxable amount, not the net gain. A shareholder who bought shares at ₹800 and received ₹1,000 in buyback was taxed on ₹1,000, not ₹200. Second, Section 48 (computation of capital gains) was inapplicable since the income was classified as dividend, removing the statutory mechanism for cost deduction. Practitioners raised strong objections, and several representations were made to the CBDT seeking a clarificatory circular. The new Income-tax Act, 2025 addressed these concerns structurally by shifting to the capital gains framework from April 1, 2026.

What Is the Capital Gains Treatment Under the New Income-tax Act, 2025?

From April 1, 2026, buyback proceeds received by shareholders of domestic companies are treated as capital gains under the new Income-tax Act, 2025 — returning to the principle embedded in Section 46A of the old Act, now renumbered and restated in the new code.

How the capital gains computation works post-April 2026:

1. The shareholder tenders shares in a buyback.
2. The buyback consideration received per share = full value of consideration for the transfer.
3. Cost of acquisition of those shares is deducted to arrive at the capital gain or loss.
4. Holding period test for listed equity shares: Held > 12 months → LTCG taxed at 12.5% (no indexation). Held ≤ 12 months → STCG taxed at 20%.
5. For unlisted company shares, the LTCG holding period threshold is 24 months.
6. If cost of acquisition exceeds the buyback price, the shareholder realises a capital loss, which can be set off against other capital gains or carried forward for up to 8 assessment years.

The difference from the deemed dividend interim period is fundamental: under capital gains, cost of acquisition is always deductible, the gain is the net appreciation, and the tax rate is capped at 12.5% for long-term holdings — rather than the shareholder’s marginal slab rate applied to the gross consideration.

Section 115QA vs. Deemed Dividend vs. Capital Gains: Key Differences at a Glance

When Does Capital Gains Treatment Apply to Share Buybacks — and When Does It Not?

The default position from April 1, 2026 is capital gains treatment for shareholders who hold shares as capital assets — that is, as investments rather than stock-in-trade. This covers retail investors, promoters, institutional investors, and most corporate shareholders.

Where capital gains treatment does not apply: Dealers in securities and certain active traders who hold shares as stock-in-trade will report buyback proceeds under “Profits and Gains of Business or Profession,” not capital gains. The character of the asset in the shareholder’s hands determines the head of income.

The transitional boundary: Any buyback transaction completed between October 1, 2024 and March 31, 2026 falls under the deemed dividend regime. The capital gains treatment of the new Act applies prospectively from April 1, 2026 only. Shareholders who tendered shares during the transitional window should verify that their ITR filings for AY 2025–26 correctly report those amounts as dividend income.

Buybacks in IFSCs: For shareholders and companies operating within International Financial Services Centres (IFSCs) governed by the IFSCA framework, specific exemptions and concessional tax provisions may apply. IFSC participants should review those provisions independently.

How Does the Holding Period Determine the Tax Rate on a Buyback After April 2026?

For long-term investors, the 12-month threshold is now the single most important variable in post-April 2026 buyback tax planning. Shareholders who have held listed equity shares for more than 12 months pay LTCG at 12.5%. Those who have held for 12 months or less pay STCG at 20%.

For promoters who acquired shares at incorporation or in early funding rounds and have held them for years, the LTCG rate of 12.5% on net gain represents a dramatic improvement over the 35.88%+ effective rate under the October 2024–March 2026 deemed dividend window. A promoter receiving ₹100 crore in a buyback with an original cost of ₹10 crore pays 12.5% on ₹90 crore = ₹11.25 crore — versus paying 35%+ on the gross ₹100 crore under the interim deemed dividend rule.

One technical nuance: the 12.5% LTCG rate under the new Act applies without indexation for listed equity. Shareholders who acquired listed shares before January 31, 2018 benefit from the grandfathering provision, which sets the cost of acquisition at the higher of (a) the actual cost or (b) the fair market value as of January 31, 2018 — preventing retrospective taxation of gains that accrued before the LTCG regime was reintroduced by the Finance Act, 2018.

What Are the Most Common Errors in Share Buyback Tax Reporting?

Several misclassifications are already surfacing in practice as companies and advisors navigate the three distinct regimes that apply to different time periods.

Applying capital gains treatment retrospectively to October 2024–March 2026 buybacks. Some assessees — and even some advisors — have incorrectly reported the interim deemed dividend period’s buyback proceeds as capital gains. The deemed dividend classification under Section 2(22)(f) is clear for that window, and applying capital gains treatment retrospectively will invite scrutiny in assessments for AY 2025–26.

Failing to claim the cost of acquisition deduction. Under the April 2026-onwards regime, the cost of shares tendered is fully deductible. Assessees who do not deduct their acquisition cost — reporting the gross buyback price as taxable gain — are overpaying tax. This oversight is surprisingly common among retail investors receiving buyback offers without dedicated tax advisory support.

Conflating the company’s tax obligations under the old and new regimes. Some compliance teams are still issuing Section 115QA declarations and seeking related confirmations from shareholders. Post-October 2024, no such obligation exists. The company’s role is limited to regulatory compliance and TDS deduction for non-resident shareholders.

Misclassifying simultaneous market sale and buyback proceeds. If a promoter sells shares in the open market and tenders a separate tranche in a buyback simultaneously, the two transactions must be reported separately — each with its own consideration, cost base, and holding period.

Worked Example: Computing Tax on a Share Buyback After April 2026

What Are the Compliance Steps for Companies Conducting Buybacks After April 2026?

Domestic entities announcing buybacks from April 1, 2026 onwards must follow these steps:

1. Board approval under Section 68(2) of the Companies Act, 2013 — a board resolution authorising the buyback, not exceeding 10% of total paid-up equity capital and free reserves.
2. Shareholder approval (if buyback exceeds 10% and up to 25% of total paid-up equity capital and free reserves) by special resolution under Section 68(3) of the Companies Act, 2013.
3. Filing of Form SH-8 (Letter of Offer) and Form SH-9 (Declaration of Solvency) under the Companies (Share Capital and Debentures) Rules, 2014.
4. SEBI compliance for listed companies — SEBI (Buy-Back of Securities) Regulations, 2018 govern the offer price, method, timeline, and disclosures.
5. No Distributed Income Tax filing — Section 115QA has been abolished. No Form filing equivalent to the old Section 115QA return is required.
6. TDS deduction for non-resident shareholders — Companies must deduct TDS on buyback consideration paid to non-residents at applicable rates under the new Income-tax Act, 2025, subject to DTAA relief where applicable.
7. Accounting treatment — Debit share capital and securities premium reserve; credit bank account per Schedule III of the Companies Act, 2013. No change from prior practice.
8.  

Frequently Asked Questions:

Is TDS deducted on share buyback proceeds for resident Indian shareholders after April 2026?

No TDS is required on capital gains from share buybacks for resident individual shareholders under the current provisions of the new Income-tax Act, 2025. The shareholder self-computes and discharges the tax liability through advance tax and ITR filing. Non-resident shareholders remain subject to TDS at applicable rates, subject to DTAA provisions.

What tax rate applies to NRI shareholders who receive buyback proceeds after April 2026?

NRI shareholders holding listed equity shares for more than 12 months are subject to LTCG tax at 12.5% (without indexation) on buyback proceeds — the same rate as resident shareholders. STCG applies at 20% for shorter holdings. NRIs may claim DTAA relief if their country of residence has a treaty with India that provides exemption or reduction on capital gains.

Are buybacks of unlisted company shares also treated as capital gains from April 2026?

Yes. The capital gains treatment under the new Income-tax Act, 2025 applies to both listed and unlisted company buybacks. For unlisted shares, the LTCG holding period is 24 months (not 12 months). LTCG on unlisted equity is taxed at 12.5% without indexation for shares sold after July 23, 2024 per the Finance (No. 2) Act, 2024 amendments.

Can a capital loss from a share buyback be set off against other capital gains?

Yes. Where the cost of acquisition of tendered shares exceeds the buyback consideration received, a capital loss arises. This loss can be set off against LTCG and STCG in the same financial year. Any unabsorbed loss can be carried forward for up to 8 assessment years and set off only against capital gains. LTCG losses can only be set off against LTCG; STCG losses can be set off against both STCG and LTCG.

Were buybacks completed between October 2024 and March 2026 taxed as deemed dividend?

Yes, without exception. Buybacks completed between October 1, 2024 and March 31, 2026 attracted deemed dividend treatment under Section 2(22)(f) of the Income-tax Act, 1961. The consideration received was taxable at applicable slab rates, with no deduction for cost of acquisition. The capital gains framework under the new Income-tax Act, 2025 is prospective — it applies only to buybacks completed on or after April 1, 2026.

Is a buyback now more tax-efficient than a dividend for long-term shareholders?

For most long-term shareholders (holding period above 12 months), a buyback is more tax-efficient than a cash dividend. Dividend income is taxed at slab rate — up to 30% plus surcharge and cess, potentially reaching 35.88% or higher. Buyback proceeds as LTCG attract 12.5%. The gap is significant, and the buyback advantage has been restored after the 18-month deemed dividend disruption. For short-term shareholders, the comparison depends on the individual’s slab rate relative to STCG at 20%.

How does the grandfathering provision for pre-2018 share acquisitions apply in a buyback?

Shareholders who acquired listed equity shares before January 31, 2018 are entitled to the grandfathering benefit introduced by the Finance Act, 2018. The cost of acquisition for LTCG computation is the higher of (a) the actual acquisition cost or (b) the fair market value (closing price on a recognised stock exchange) of the share as on January 31, 2018 — capped at the actual buyback consideration. This grandfathering benefit applies equally to buyback transactions post-April 2026.

Does the company need to obtain a tax clearance or NOC from shareholders before accepting buyback tenders?

No such requirement exists under the new Income-tax Act, 2025 for resident shareholders. The company is not responsible for the shareholder’s capital gains computation or payment. For non-resident shareholders, the company must ensure appropriate TDS deduction, and DTAA claim procedures (Form 10F, Tax Residency Certificate) remain the shareholder’s responsibility.

Share Buyback vs. Dividend: Which Structure Works Better After April 2026?

A pattern familiar from the pre-2024 era is re-emerging — buybacks are once again the structurally superior capital return mechanism for long-term shareholders, following the April 2026 capital gains reclassification. The numbers, as illustrated by the worked example above, speak clearly: LTCG at 12.5% against dividend slab rates of 30%+ represents a difference that no financial planner can responsibly ignore in a high-net-worth context.

That said, the choice between dividends and buybacks is never purely a tax decision. Dividends reach all shareholders proportionally, including those unable or unwilling to participate in a buyback. Buybacks require regulatory compliance under the Companies Act and SEBI framework, carry public announcement obligations, and consume management bandwidth. For companies with a fragmented shareholder base or where liquidity in the scrip is thin, dividends remain operationally simpler. Companies with promoter-heavy ownership, strong free cash flow, and undervalued stock remain the natural candidates for buyback programs.

The strategic recalibration underway in April 2026 boardrooms is predictable: the 18-month pause caused by the deemed dividend uncertainty has built up a pipeline of companies with surplus cash and no deployed vehicle. Expect a significant uptick in buyback announcements through FY 2026–27 as CFOs and boards absorb the new rules. Shareholders and advisors who understand the capital gains framework today will be best placed to optimise participation, timing, and tax position.

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