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Income Tax on Buyback of Shares

Updated on: 18 Jun, 2026 06:50 PM

Income tax on share buyback depends on the date of the buyback and the tax rules applicable at that time. In India, the taxation of share buybacks has undergone significant changes, shifting the tax burden from companies to shareholders and later modifying the treatment of buyback proceeds. As a shareholder, you may be required to pay tax on the amount received from a buyback, claim capital gains or losses, and report the transaction correctly in your Income Tax Return (ITR). Understanding the latest buyback tax rules can help you calculate your tax liability accurately and avoid reporting errors.

Contents

Union Budget 2026 Updates

  • Minimum Alternate Tax (MAT) proposed to be treated as final tax, reducing future litigation.
  • MAT credit set-off allowed up to 25% of tax liability under the new regime.
  • Share buybacks to be taxed as capital gains for all shareholders.
  • Promoters to pay additional buyback tax, ensuring equitable taxation.

Income Tax Act 2025 Update

  • The Income Tax Act, 2025 have replaced the terms Previous Year & Assessment Year with the term Tax Year. For example, if the income was earned in the year 2025-26, it will be called Tax Year 2025-26. However, since many taxpayers are still familiar with the terms Financial Year (FY) and Assessment Year (AY), this guide continues to use them for easier understanding.
  • The new Income Tax Act has renumbered most of the sections and simplified them by reducing the number of sections, schedules, etc.

You can refer to the complete section mapping of Income Tax Act 1961 vs Income Tax Act 2025 here.


What is a Buy-back of Shares?

Buyback of shares refers to the process of repurchasing the shares of the company issued by them. The company generally buys the shares at market price or a higher price. This is done to regain the ownership of the company's shares and repay the money of the shareholders. The provisions for the buy-back of shares are laid out in Section 115QA of the Income Tax Act of 1961.

Why do Companies Buy-back Shares?

In FY 2023, Indian companies announced a buyback of more than Rs.48,000 cr. Having said that, here are some reasons why companies consider buying back their shares and what are its benefits -

  • Consolidated Ownership: Holding a significant portion of shares leads to broad ownership and higher expenses for the company. Thus, to achieve a balance between compact ownership and minimizing capital costs, share buybacks are employed.
  • Share Price Adjustment: The market value of shares may be substantially undervalued due to various factors. Therefore, a buyback initiative aids in rectifying the market price.
  • Enhanced Financial Appeal: Share buybacks can enhance a company's financial appeal. By reducing the total number of shares in circulation, the earnings per share (EPS) of the company increase.
  • Promoter Stake Increase: Buyback strategies are frequently utilized when the promoters of a company intend to increase their stake in the company.
Claim Your Tax Refund for FY 2025-26

Key Changes introduced in ITR forms for (AY) 2025–26

  • Inclusion of Long-Term Capital Gains (LTCG) in ITR-1 and ITR-4
    Previously, taxpayers with any LTCG were required to file more complex forms like ITR-2 or ITR-3. Now, individuals with LTCG up to ₹1.25 lakh from listed equity shares or equity mutual funds under Section 112A can file using the simpler ITR-1 (Sahaj) or ITR-4 (Sugam) forms, provided there are no carried forward losses.
  • Segregation of Capital Gains Based on Transaction Date
    The updated ITR forms now require taxpayers to report capital gains separately for transactions executed before and after July 23, 2024. This change aligns with the revised capital gains tax rules introduced in the Union Budget 2024, which, among other things, reduced the LTCG tax on real estate to 12.5% without indexation from the previous 20% with indexation.
  • Reporting of Buyback Proceeds as Deemed Dividends
    From October 1, 2024, proceeds received from the buyback of shares by domestic listed companies are to be treated as deemed dividends. The updated ITR forms require these proceeds to be reported under 'Income from Other Sources.' Additionally, the capital gains schedule should reflect zero sale proceeds, allowing the cost of acquisition to be claimed as a capital loss, which can be carried forward for up to eight assessment years.
  • Enhanced Capital Gains Reporting in ITR-7
    For trusts, NGOs, and other institutions filing ITR-7, there is now a requirement to disclose capital gains separately for transactions before and after July 23, 2024. This change ensures accurate tax calculations in light of the revised capital gains tax rules.
  • Increased Threshold for Asset and Liability Reporting
    In the ITR-2 form, the threshold for mandatory reporting of assets and liabilities has been raised to ₹1 crore. This adjustment aims to reduce the compliance burden for taxpayers with assets below this threshold.

Why is Buy-back Tax Levied on Companies?

Previously, when companies paid dividends, they had to pay Dividend Distribution Tax (DDT). However, when they distributed funds to shareholders through share buybacks, the tax responsibility shifted to the shareholders in the form of capital gains. The company itself didn't have to pay any tax for the buyback.

Because capital gains tax rates are usually lower, and not all shareholders earn income above the basic exemption limit, companies, especially unlisted ones, started preferring share buybacks over dividend payouts to avoid taxes.

Some foreign companies took advantage of tax treaties to avoid taxes on capital gains. They encouraged investee companies not to pay dividends but to buy back shares, resulting in tax-free capital gains for the foreign entities.

To prevent tax avoidance, the government introduced section 115QA under the Income Tax Act in 2013 for unlisted companies. In July 2019, these rules were extended to cover share buybacks by listed companies as well.

However, buyback tax levied on companies will be a thing of the past as the 2024 budget includes a new rule that will take effect on October 1, 2024. This rule states that any buyback amount received by shareholders will be considered a form of dividend and will be taxed as such (In the hands of the shareholders). The cost of the shares bought back by the company will be treated as a capital loss. This loss may be offset against any other capital gains throughout the year, and if the capital gains for the year are insufficient. If there are not enough capital gains to offset the loss in the current year, it can be carried forward and offset against capital gains in future years, up to a maximum of 8 years.

Buyback tax before and after 30th September

Prior to the 2024 budget, the tax for share buybacks was paid by the company itself. For instance, when Company ABC repurchased its shares, the company would bear the tax liability associated with the buyback. Any amount subsequently received by the shareholders was tax-free. This system effectively meant that the investors benefited from the gains, while the company bore the tax burden. This old rule remained in place until September 30, 2024.

What are the Income Tax Provisions for the Buy-back of Shares?

The tax treatment of share buybacks depends on the date of the buyback:

For buybacks up to 30 September 2024

  • The company paid buyback tax under Section 115QA.
  • Shareholders were exempt from tax under Section 10(34A).

For buybacks from 1 October 2024 to 31 March 2026

  • The buyback amount received by shareholders is treated as deemed dividend income.
  • The amount is taxable in the hands of shareholders at applicable slab rates.
  • The company is not liable to pay buyback tax under Section 115QA.

For buybacks on or after 1 April 2026

  • Buybacks are taxed under the capital gains framework.
  • Shareholders are taxed only on the actual gain after deducting the cost of acquisition.
Buyback Date Tax Treatment
Up to 30 Sept 2024 Company paid buyback tax under Section 115QA
1 Oct 2024 – 31 Mar 2026 Entire buyback proceeds taxable as deemed dividend
On or after 1 Apr 2026 Taxable as capital gains

Tax Rate Under Section 115QA

Under Section 115QA of the Income Tax Act, any domestic company that undertakes a buy-back of its own shares is liable to pay an additional income tax on the distributed income. This tax is commonly referred to as the Buy-Back Tax or Buy-Back Distribution Tax (BDT).

The tax is levied at an effective rate of 23.296%, which includes:

  • Basic tax rate: 20%
  • Surcharge: 12% on the tax
  • Health and Education Cess: 4% on the total of tax + surcharge

This tax is payable by the company, not the shareholder, and applies regardless of whether the shares are listed or unlisted.

What are the Examples of Buy-back of Shares?

Example 1: Buyback Before 1 October 2024

Mr. A purchased shares for ₹1,00,000. The company offered a buyback and paid ₹1,50,000 to Mr. A. The buyback was completed on 15 September 2024.

Tax Treatment

  • The company was liable to pay buyback tax under Section 115QA.
  • The amount received by Mr. A was exempt from tax under Section 10(34A).
  • Mr. A was not required to pay tax on the buyback proceeds.

Tax Calculation

Particulars Particulars
Cost of shares 1,00,000
Buyback proceeds 1,50,000
Taxable income in shareholder's hands Nil
Tax payable by shareholder Nil

Example 2: Buyback Between 1 October 2024 and 31 March 2026

Ms. B purchased shares for ₹1,00,000. The company bought back the shares for ₹1,50,000. The buyback was completed on 15 January 2026.

Tax Treatment

  • The entire buyback consideration of ₹1,50,000 is treated as deemed dividend income and taxed in the hands of the shareholder.
  • The cost of acquisition cannot be deducted while computing dividend income.
  • The cost of shares may be considered separately as a capital loss, subject to the applicable provisions of the Income-tax Act.

Tax Calculation

Particulars Amount (₹)
Cost of shares 1,00,000
Buyback proceeds received 1,50,000
Taxable dividend income 1,50,000
Capital loss that may be claimed separately* 1,00,000

*Subject to fulfilment of applicable conditions under the Income-tax Act.

Ms. B will pay tax on ₹1,50,000 at her applicable income tax slab rate.

Example 3: Buyback On or After 1 April 2026

Mr. C purchased shares for ₹1,00,000. The company bought back the shares for ₹1,50,000. The buyback was completed on 20 April 2026.

Tax Treatment

  • Buyback proceeds are taxed under the capital gains provisions.
  • The shareholder can deduct the cost of acquisition from the sale consideration.
  • Tax is payable only on the actual gain.

Tax Calculation

Particulars Amount (₹)
Buyback proceeds 1,50,000
Less: Cost of acquisition (1,00,000)
Taxable capital gain 50,000

Mr. C will pay tax only on the capital gain of ₹50,000. The applicable tax rate will depend on factors such as the type of shares and the holding period.

What is the Due Date for Paying the Buyback Tax?

The company has to pay the tax within 14 days of paying any amount to the shareholders on the buy-back of shares under section 115QA of the ITA. If the company fails to pay the tax by the due date, then it is liable to pay simple interest @1% per month or part thereof on the tax amount starting from the date immediately after the due date till the date on which the tax is paid.

Capital Gains Tax Worries?

How is Tax Calculated on Buy-back of Shares?

Tax is imposed on the income from buybacks for both listed and unlisted companies. The distributed income is calculated as the buyback payment minus the amount received for the shares initially issued.

In cases where buybacks occur through open market transactions, making out individual purchase prices is difficult. Nevertheless, taxation still applies to the company based on the difference between the buyback price and the initial share issuance price, regardless of market prices.

Income or gains from buybacks are tax-exempt in the hands of shareholders under section 10(34A) of the Income Tax Act, 1961, to prevent double taxation. Shareholders should be aware of the considerations under Section 14A.

Unlike before, companies now cannot avoid taxation by opting for the buyback route instead of paying dividends. After the amendments introduced in the Finance Act 2020, distributing dividends is now a more tax-efficient option for companies as they are not liable to pay tax on dividends.

Frequently Asked Questions

Q- What is the new tax treatment for share buybacks?

Effective October 1, 2024, the tax treatment of share buybacks will change. The proceeds from share buybacks will now be considered dividend income. This means shareholders will be subject to income tax on the amount they receive from the buyback, according to their applicable tax slab. Importantly, there will be no tax deduction allowed for the cost of acquiring the shares that were bought back.

Q- How does the new tax treatment differ from the previous tax treatment?

Under the previous tax regime, companies were liable to pay a special tax on share buybacks under Section 115QA of the Income Tax Act 1961. To prevent double taxation, the income received by shareholders from such buybacks was exempt from tax under Section 10(34A). However, the new rule shifts the tax burden from companies to the shareholders.

Q- What are the tax implications for shareholders after 1st October?

Under the new rule, shareholders must declare the proceeds from share buybacks as part of their total income. This income will then be taxed at the applicable income tax slab rate. This change is intended to make the tax treatment of share buybacks consistent with the taxation of dividends.

Q- Are there any exceptions to this rule?

The new tax treatment applies to all buybacks conducted on or after October 1, 2024. There are no specific exceptions mentioned in the budget update.

Q- Is share buyback taxable in India?

Yes, share buyback proceeds are taxable in India. However, the tax treatment depends on the date of the buyback. For buybacks completed between 1 October 2024 and 31 March 2026, the amount received is generally taxable as deemed dividend income in the hands of the shareholder. For buybacks on or after 1 April 2026, taxation generally applies under the capital gains provisions.

Q- What is the tax treatment of share buybacks after 1 April 2026?

For buybacks completed on or after 1 April 2026, shareholders are generally taxed under the capital gains provisions. The cost of acquisition of shares can be deducted from the buyback consideration, and tax is payable only on the actual capital gain.

Q- Is buyback income taxed as dividend or capital gains?

The answer depends on the date of the buyback. Buybacks completed between 1 October 2024 and 31 March 2026 are generally taxed as deemed dividend income. Buybacks completed on or after 1 April 2026 are generally taxed under the capital gains provisions.

Q- How is tax calculated on share buyback proceeds?

Tax calculation depends on the applicable buyback tax regime. Under the capital gains regime, tax is calculated on the difference between the buyback price and the cost of acquisition of shares. Under the deemed dividend regime, the entire buyback consideration may be taxable without allowing deduction of the share purchase cost from such income.

Q- Can I claim the purchase cost of shares against buyback income?

For buybacks taxed under the deemed dividend regime, the purchase cost of shares cannot be deducted from the dividend income. However, the cost may be considered separately as a capital loss, subject to the provisions of the Income-tax Act.

Q- How do I report share buyback income in my ITR?

The reporting requirement depends on the applicable tax regime. Buyback proceeds taxable as deemed dividend income are generally reported under the "Income from Other Sources" schedule. Buybacks taxed under the capital gains provisions are reported in the Capital Gains schedule of the Income Tax Return.

Q- Is TDS deducted on share buyback proceeds?

Yes, tax may be deducted at source on buyback proceeds where required under the Income-tax Act. Shareholders should verify the TDS reflected in Form 26AS or the Annual Information Statement (AIS) before filing their ITR.

Q- Do listed and unlisted company buybacks have different tax rules?

The tax treatment primarily depends on the applicable legal provisions and the date of the buyback. While procedural requirements may differ, both listed and unlisted company buybacks are subject to the tax rules applicable for the relevant period.

Q- Can I carry forward a loss arising from a share buyback?

Where permitted under the Income-tax Act, a capital loss arising from a share buyback may be carried forward and set off against eligible capital gains in future years, provided the prescribed conditions are satisfied and the return is filed within the due date.

Q- Which tax rules apply if the buyback happened before 1 October 2024?

For buybacks completed up to 30 September 2024, the company was generally liable to pay buyback tax under Section 115QA, and the amount received by shareholders was exempt from tax under Section 10(34A), subject to the applicable provisions.

Q- Is participating in a buyback better than selling shares on the stock exchange?

The answer depends on factors such as the buyback price, market price, holding period, tax implications, and the investor's tax slab. Investors should compare the post-tax proceeds under both options before making a decision.

Q- Are share buybacks subject to short-term or long-term capital gains tax?

For buybacks taxed under the capital gains provisions, the nature of the gain depends on the holding period of the shares. Gains may be classified as short-term or long-term capital gains based on the applicable rules for the type of shares being transferred.

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