Taxation of Buyback of Shares - Old vs. New Income Tax Act 2025 Comparative

Taxation of Buyback of shares in the hands of Promoter Shareholders and regular Retail Shareholders under the New Income Tax Act 2025 explained

The buy-back of shares by a company from its own shareholders is one of the most strategically significant yet tax-sensitive corporate transactions under Indian law. Over the past decade, the taxation of buy-back proceeds has undergone three distinct and fundamentally different legislative regimes, each reflecting shifting policy objectives of the Government of India — from incentivising capital return, to neutralising tax arbitrage, and ultimately, to protecting retail investors while imposing a special punitive levy on promoters.

This article undertakes a rigorous comparative analysis of the tax treatment of buy-back consideration specifically in the hands of promoters, a class of shareholders uniquely positioned to influence corporate decisions, across the three tax treatments set out below:

• The original regime under Section 115QA of the Income Tax Act, 1961 (up to 30th September, 2024);

• The transitional deemed dividend regime under Section 2(22)(f) of the Income Tax Act, 1961, re-enacted in the Income-Tax Act, 2025 (1st October, 2024 to 31st March, 2026); and

• The rationalised Capital Gains regime under Section 69 of the Income-Tax Act, 2025, as amended by Finance Act, 2026 (effective 1st April, 2026 onwards).

 

The analysis draws from the bare statutory text, Explanatory Memoranda, Finance Minister's Budget Speeches, and SEBI regulations to provide a complete picture for tax professionals advising promoters and corporates on buyback structuring.

I. BUY-BACK OF SHARES — CORPORATE LAW FRAMEWORK

Before entering the tax analysis, it is necessary to briefly outline the corporate law framework governing buy-backs, as the tax law is directly anchored to it.

1.1  Corporate Definition under Companies Act, 2013

A buy-back of shares is governed by Section 68 of the Companies Act, 2013. It refers to the repurchase by a company of its own shares or other specified securities from its shareholders out of (i) free reserves, (ii) the securities premium account, or (iii) proceeds of any shares or securities, subject to prescribed conditions.

 

1.2  Key Conditions under Section 68

• Buy-back cannot exceed 25% of the aggregate of paid-up capital and free reserves in a financial year;

• Post-buy-back, the debt-equity ratio cannot exceed 2:1;

• Only fully paid-up shares can be bought back;

• Shares must be extinguished and physically destroyed within seven days of buy-back;

• A cooling-off period of one year applies between two successive buy-backs.

 

For listed companies, the procedure is further regulated by SEBI (Buy-Back of Securities) Regulations, 2018, which define the methods of buy-back (tender offer, open market, odd-lot) and the meaning of 'promoter' for regulatory purposes. This definition is now adopted by the Income-Tax Act, 2025.

II. PHASE 1 — THE ORIGINAL REGIME UNDER SECTION 115QA (UP TO 30TH SEPTEMBER, 2024)

2.1  Legislative Genesis

The buy-back tax regime was originally introduced by the Finance Act, 2013 through the insertion of Section 115QA in the Income Tax Act, 1961, applicable initially only to unlisted companies. The rationale was to plug a tax arbitrage wherein certain unlisted companies were distributing profits through buy-backs rather than dividends, thereby avoiding Dividend Distribution Tax (DDT) that applied to dividend payouts. In July 2019 (Finance (No. 2) Act, 2019), the provisions were extended to cover listed companies as well, completing the universe of companies subject to Section 115QA.

2.2  Statutory Context of Section 115QA

Section 115QA — Tax on Distributed Income of Domestic Companies on Buyback of Shares

115QA(1): Notwithstanding anything contained in any other provision of this Act, any amount of tax on the distributed income paid to the shareholders shall be charged from the domestic company at the rate of 20% (plus applicable surcharge and cess).

  

'Distributed Income' was defined as consideration paid for buy-back MINUS amount received by the company at the time of issue of shares bought back.

Section 115QA(3): The amount of distributed income paid to a shareholder shall NOT be deemed to be income of the shareholder.

Section 10(34A): Any income arising to a shareholder on account of buy-back of shares is EXEMPT from tax in the hands of the shareholder. Income was defined as the consideration paid for buy-back MINUS amount received by the company at the time of issue of shares bought back.

 

Section 115QA(3): The amount of distributed income paid to a shareholder shall NOT be deemed to be income of the shareholder.

 

Section 10(34A): Any income arising to a shareholder on account of buy-back of shares is EXEMPT from tax in the hands of the shareholder.

2.3  Tax in the Hands of the Promoter — Phase 1

Under this regime, the tax treatment for a promoter-shareholder was as follows:

 

Parameter	Position under Section 115QA
Tax Payer	The domestic company — NOT the shareholder
Rate of Tax	20% + surcharge (12%) + cess (4%) = ~23.3% effective on distributed income
Promoter's Receipt	ENTIRELY TAX-FREE — Exempt under Section 10(34A)
Capital Gains Computation Rate of Tax	NOT APPLICABLE — No capital gains computation required in promoter's hands
Overall Tax Burden on Promoter	NIL — Zero direct tax liability

Assessment for Promoters: Section 115QA was extremely beneficial for the promoter shareholders. The entire buy-back proceeds, irrespective of quantum, holding period, or the magnitude of gain, were received tax-free by the promoter-shareholder. Th is is because the company bore the tax liability, while the promoter personally paid zero tax. This made buy-backs a highly preferred route for promoters to extract value from their companies.

2.4  The Tax Arbitrage — Why Promoters Preferred Buybacks

Mode of Distribution	Tax on Company	Tax on Promoter
Dividend (pre-2020)	DDT @ ~20.56%	Exempt under Section 10(34)
Dividend (post-2020)	NIL (DDT abolished)	Taxable at slab — up to 42.7% for high-income individuals
Buyback (pre-Oct 2024)	20% on distributed income under section 115QA	EXEMPT — Section 10(34A). Zero tax.

The abolition of DDT by the Finance Act, 2020 made the contrast even more stark: dividends became fully taxable at slab rates in the hands of promoters (who are typically in the highest bracket), while buy-back proceeds remained entirely exempt. This created a powerful incentive for high-income promoters to route distributions through buy-backs — a gap the Government ultimately moved to close.

III. PHASE 2 — THE DEEMED DIVIDEND REGIME (1ST OCTOBER, 2024 TO 31ST MARCH, 2026)

3.1  The Policy Shift Under Finance Act, 2024

The Union Budget 2024 introduced a fundamental restructuring of the buy-back tax framework, effective October 01, 2024. The Government's stated objectives were to remove the tax arbitrage between buy-backs and dividends post-abolition of DDT, shift the tax incidence from the company to the shareholder receiving the economic benefit and address the disproportionate benefit accruing to large promoter-shareholders through the buy-back route.

3.2  The Three Simultaneous Amendments

Amendment 1 — Section 2(22)(f): Definition of Dividend Expanded

A new clause (f) was inserted in Section 2(22) of the Income Tax Act, 1961 to include within the definition of 'dividend' on:

 

'Any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of Section 68 of the Companies Act, 2013.'

 

Effect: The entire buy-back consideration received by the shareholder was re-characterised as 'dividend' income, taxable as 'Income from Other Sources' at the applicable slab rate.

Amendment 2 — Proviso to Section 46A: Deemed Consideration = Nil

Section 46A of the Income Tax Act, 1961 was amended to insert a proviso stating that:

 

'In the case of a buy-back of shares that takes place on or after October 01, 2024, the consideration received by the shareholder shazll be deemed to be NIL for the purpose of computing capital gains.'

 

Effect: Since the 'full value of consideration' for capital gains purposes was nil, a notional capital loss arose equal to the cost of acquisition of the shares tendered.

Amendment 3 — Section 115QA Repealed for Post-October 2024 Buybacks

The proviso to Section 115QA provided that its provisions shall NOT apply to any buy-back of shares taking place on or after October 01, 2024.

 

Effect: Companies executing buy-backs from October 2024 onwards are no longer liable to pay the 20% distributed income tax. The entire tax burden shifts to shareholders.

3.3  Re-enactment under Income-Tax Act, 2025

The Income-Tax Act, 2025 replaced the Income Tax Act, 1961 with effect from April 01, 2026, re-enacted the deemed dividend framework through Section 2(40)(f) (re-enacted definition of dividend including buy-back consideration) and Section 69(1) (capital gains on buy-back with consideration taken as nil). The consequent tax treatment remained identical to the post-October 2024 position.

3.4  Tax in the Hands of the Promoter — Phase 2

Parameter	Position under Deemed Dividend Regime
Tax Payer	The promoter-shareholder bears full liability
Head of Income	Income from Other Sources (as 'deemed dividend')
Tax Base	ENTIRE buy-back consideration received — not just the gain
Applicable Tax Rate	Individual promoter: up to 30% slab + surcharge (15%) + cess (4%) = up to ~35.88% effective rate on GROSS receipt
Capital Treatment of Cost	Capital loss is the initial cost of acquisition of the shares (deemed consideration = nil). Loss to be usable only against capital gains — NOT against deemed dividend income.
Company-Level Tax	NIL — Section 115QA not applicable after October 01, 2024
Overall Burden on Promoter	VERY HIGH — Tax on gross receipt in the hands of shareholders and the capital loss on purchase of shares gets trapped with limited utility

Assessment for Promoters: Extremely Detrimental. The deemed dividend approach taxes the gross receipt rather than the net gain, creating situations where the effective tax rate on economic profits exceeded 44%. The capital loss created was a 'phantom' benefit — it could only be utilised against future capital gains and if no such gains existed, the loss was wasted after 8 assessment years.

IV. PHASE 3 — THE CAPITAL GAINS REGIME UNDER FINANCE ACT, 2026 (w.e.f. APRIL 01, 2026)

4.1  Policy Rationale — Finance Bill, 2026

The Finance Bill, 2026 proposed to rationalise buy-back taxation by:

• Reverting the tax treatment of buy-back proceeds from the dividend framework back to the Capital Gains framework;

• Taxing only the actual economic gain (sale price minus cost) rather than the gross receipt;

• Introducing a 'special additional tax' exclusively applicable to promoter-shareholders to neutralise tax arbitrage; and

• Retaining simplicity for retail and non-promoter shareholders.

 

The Explanatory Memorandum to Finance Bill, 2026 explicitly noted: "Having regard to the distinct position and influence of promoters in corporate decision-making, particularly in relation to buy-back transactions, it is proposed that, in the case of promoters, the effective tax liability on gains arising from buy-back shall be thirty per cent, comprising tax payable at the applicable rates together with an additional tax."

4.2  Amendments to Income-Tax Act, 2025 — Clause 34 of Finance Bill, 2026

Section 69(1) — Income-Tax Act, 2025 [Unchanged]

Where a shareholder receives, in respect of the buy-back of shares by a company, any consideration which is in excess of the cost of acquisition thereof:

 

Such excess shall be chargeable to tax as CAPITAL GAINS in the hands of the shareholder.

 

Computation follows normal capital gains principles. STCG if held 12 months or less and LTCG if held more than 12 months.

Section 69(2) — NEWLY SUBSTITUTED — Additional Tax for Promoters

Where the shareholder is a PROMOTER, the aggregate income-tax payable on such capital gains shall comprise:

 

(a)  The income-tax payable at normal rates under the Act; AND

 

(b)  An additional income-tax at the rates specified in the Table below:

 

LONG-TERM CAPITAL GAINS (held > 12 months):

• Non-Corporate Promoters:  Additional tax = 17.5%  [Normal LTCG 12.5% + Additional 17.5% = 30% effective]

• Corporate Promoters (Domestic Company):  Additional tax = 9.5%  [Corporate LTCG 12.5% + Additional 9.5% = 22% effective]

 

SHORT-TERM CAPITAL GAINS (held 12 months or less):

• Non-Corporate Promoters:  Additional tax = 10%  [Normal STCG 20% + Additional 10% = 30% effective]

• Corporate Promoters (Domestic Company):  Additional tax = 2%  [Normal STCG 20% + Additional 2% = 22% effective]

 

Surcharge on Additional Tax:  12% flat (per Lok Sabha amendment to Finance Bill, 2026)

Section 69(3) — Definition of 'Promoter'

(a) For a LISTED company: 'Promoter' has the same meaning as in Regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018.

 

(b) For an UNLISTED company: 'Promoter' means —

    (i) A promoter as defined in Section 2(69) of the Companies Act, 2013; OR

  (ii) A person holding shares not less than the percentage prescribed under the Income Tax Rules, 2025.

 

(c) 'Specified Securities' has the same meaning as in Explanation 1 to Section 68 of the Companies Act, 2013.

4.3  Tax in the Hands of the Promoter — Phase 3

Parameter	Position under Finance Act, 2026
Tax Payer	Promoter-shareholder
Head of Income	Capital Gains (LTCG or STCG based on holding period)
Tax Base	ACTUAL GAIN = Buy-back Price MINUS Cost of Acquisition
Normal CG Tax	LTCG @ 12.5% (held > 12 months)  |  STCG @ 20% (held <= 12 months) + surcharge + cess
Additional Tax — Individual Promoter	LTCG: additional 17.5%  |  STCG: additional 10%  (total effective 30%)
Additional Tax — Corporate Promoter	LTCG: additional 9.5%  |  STCG: additional 2%  (total effective 22%)
Surcharge on Additional Tax	12% flat rate per Lok Sabha amendment
Phantom Capital Loss?	NO — actual gain is the tax base. No phantom loss issue.
Company-Level Tax	NIL

5.  Open Market Sale vs. Buy-Back — The Residual Arbitrage

A critical observation for promoters: the effective rate on buy-back gains (30% for individuals, 22% for companies) is significantly higher than the rate on open market sales of listed shares:

Route of Exit	Non-Corporate Promoter	Corporate Promoter
Open Market Sale (LTCG)	12.5% + surcharge + cess	12.5% + surcharge + cess
Buy-Back (LTCG)	30% effective + surcharges + cess	22% effective + surcharges + cess
Diffrential Tax Burden on Adopting Buy-Back Route	17.5% additional tax	9.5% additional tax

 

This differential creates a strong tax incentive for promoters to exit through open market sales or Offer for Sale (OFS) mechanisms rather than through company buy-backs, particularly when the promoter intends to reduce their stake in any event. Practitioners advising promoters on exit strategies must factor this tax differential carefully.

6.  Carry-Forward of Losses — Phase 2 Legacy Issues

Promoters who participated in buy-backs between October 01, 2024 and March 31, 2026 will have crystallised notional capital losses (under the deemed consideration = nil mechanism). These losses can be:

• Set off against capital gains in the same assessment year (AY 2025-26 or AY 2026-27 as applicable);

• Carried forward for up to 8 assessment years; and

• Set off only against capital gains — NOT against income from other sources, salary or business income.

 

Practitioners must ensure these losses are properly reported in Schedule CG of the ITR to preserve the carry-forward entitlement and advise clients on utilising these losses efficiently against future capital gains.

7.  TDS and Withholding Obligations — Company's Perspective

Under the new regime, the company executing the buy-back must:

• Determine the residential status of each shareholder based on NSDL/CDSL records or Registrar data as on the Record Date;

• Compute TDS on capital gains for resident shareholders at applicable rates, with the promoter additional tax factored in;

• For non-resident shareholders, apply DTAA provisions, subject to the availability of Tax Residency Certificate (TRC) and Form 10F;

• Report TDS in Form 26Q (resident) and Form 27Q (non-resident) with correct categorisation of promoter vs. non-promoter status.

 

Non-compliance with TDS obligations exposes the company to interest under Sections 201 and 206C, penalties and potential disallowance.

8.  Non-Resident Promoters — Special Considerations

• For non-resident promoters, the interplay of domestic law with Double Tax Avoidance Agreements (DTAAs) adds significant complexity:

• Under domestic law, capital gains on buy-back are taxable at 30% effective rate for individual non-corporate promoters;

• Non-residents may be entitled to beneficial DTAA rates on capital gains — depending on the treaty provisions of their country of residence;

• GAAR provisions and Multilateral Instrument (MLI) anti-avoidance measures must be examined to ensure the DTAA benefit is not denied;

• Non-resident promoters must furnish TRC, Form 10F and a No-Permanent-Establishment certificate to avail DTAA benefits;

• Whether the additional promoter tax under Section 69(2)(b) is sheltered under a DTAA capital gains provision or constitutes a separate additional levy outside normal treaty scope remains an open question and this is likely to be a point of future litigation.

9. CONCLUSION AND PRACTICAL TAKEAWAYS

The evolution of buy-back taxation through three distinct phases reflects a clear Government policy trajectory, from encouraging capital return mechanisms (Phase 1) to neutralising tax arbitrage (Phase 2) to calibrated rationalisation with promoter-specific accountability (Phase 3).

 

For promoters, the bottom line is this: The Finance Act, 2026 regime is a partial relief from the extreme burden of Phase 2, but it is definitively not a restoration of the pre-2024 tax-free era. The Government has permanently embedded a promoter-specific tax penalty (diffrential extra tax applicable over capital gains tax rate) of 17.5% (individual) or 9.5% (company) above normal capital gains rates, a policy position that is unlikely to be reversed given its stated anti-arbitrage rationale.

 

DISCLAIMER

This article is prepared solely for the purpose of awereness and professional education of Chartered Accountants, Advocates and other legal and tax professionals. It does not constitute legal or tax advice. The provisions discussed herein are based on statutory text and publicly available explanatory material as of the date of preparation. Practitioners are advised to examine the latest notifications, circulars and judicial precedents before advising clients. Neither the author nor the firm and companies she represents, nor any of its employes or associates, are responsible for any action taken based on this material without independent professional verification.