The idea of companies repurchasing their own shares was first adopted in the United Kingdom in the early 1980s as part of broader efforts to align company law with evolving international standards.

In India, buyback of shares was initially considered to be the release of assets by a Company and the approval of the Company’s Court was mandatory. In 1998 the Indian Companies Act, 1956 was amended to introduce Section 77A, 77AA and 77B to provide a ‘fast track’ way to return capital without the Court’s intervention. The Companies Act, 2013 continues to support this framework through Sections 68, 69 and 70, which outline the conditions, procedures and restrictions applicable to buyback of shares.

Indian Income Tax – story till now

The taxation of buyback proceeds in India has been almost like a journey shaped by several policy changes.

When aforesaid ‘fast track’ buybacks were first permitted under the Companies Act, 1956 through the 1998 amendment, the Income Tax Act, 1961 treated the proceeds received by shareholders as deemed dividend, but only to the extent of the company’s accumulated profits. This meant shareholders were taxed as if they were receiving dividends.

Change of Head of Income

From 1 April 1999, the rules changed. Buyback proceeds were no longer treated as dividend income. Instead, they were taxed as capital gains, giving shareholders the advantage of lower tax rates and even the benefit of indexation, in many cases.

Change in taxability from shareholder level to company level

A major shift came on 1 June 2013, when the Buyback Tax was introduced for unlisted companies carrying out buyback under Section 77A of the Companies Act, 1956. Under this scheme, it was the company—not the shareholder—that paid tax at a flat rate on the distributed income. In turn, any amount received by the shareholder became fully exempt under Section 10(34A). This was introduced to ensure certainty, prevent tax avoidance, and simplify compliance for shareholders.

From 1 June 2016, the scope of this Buyback Tax was expanded. The law now covered buybacks carried out under any law for the time being in force relating to companies, which meant even companies using Court-approved schemes would fall under the same tax regime. Eventually, the amendment extended this framework to listed companies as well. Any buyback for which a public announcement was made on or after 6 July 2019 were subject to the Buyback Tax.

Back to taxability at the shareholder level

In 2020, the taxation of dividend income changed, and dividends were taxed in the hands of shareholders. Dividend Distribution Tax was abolished. A similar tax treatment was sought for buyback since, as per the tax authorities, both dividends and buyback are methods for the company to distribute accumulated reserves. Accordingly, from 1 October 2024, the buyback of shares was again deemed as dividend. Under this regime, the buyback proceeds are considered dividend income for tax purposes, while the shareholder’s original cost of acquisition is treated as a capital loss.

Amendment proposed by the Finance Bill, 2026

It is now proposed to rationalise the taxation of share buyback by providing that the consideration received by shareholders on the buyback of shares of a company will be taxed as Capital Gains in their hands, instead of as dividends.

Further, having regard to the distinct position and influence of promoters in corporate decision-making, particularly in relation to buy-back transactions, an additional income tax is proposed to be levied where the shares are held by promoters. The effective tax rates in such cases will be as follows:

Where the Promoter is a domestic company

Where the Promoter is any other person

The proposed amendment seems to be a course correction for the non-promoters.

Consequential amendments expected before enactment of the Finance Bill, 2026

Until 1 October 2024, when gains from buyback were taxable under the head ‘Capital Gains’, buyback was specifically excluded from the definition of ‘dividend’, in order to avoid ambiguity and potential litigation on characterisation and Head of income. Under the new definition of ‘dividend’, however, there is no corresponding proposal to specifically exclude buyback.

It appears that the reference to additional capital gains tax on promoters has been missed in the calculation of the surcharge proposed in the Finance Bill, 2026, resulting in no surcharge being considered on the additional capital gains tax.

It is likely that these changes may be made before the passage of the Finance Act, 2026.

Who is classified as a ‘Promoter’?

In case of listed Companies, a ‘Promoter’ refers to any person who is classified as such in accordance with SEBI (Buy-Back of Securities) Regulations, 2018.[1]

Accordingly, a ‘Promoter’ includes a person:

A Promoter in any other case means a promoter as defined in section 2(69) of the Companies Act, 2013 or a person who holds, directly or indirectly, more than 10% of the shareholding in the company.

The Companies Act, 2013 refer to a Promoter as any person:

The second limb of the definition of a Promoter in any other case, refers to any shareholder holding more than 10%, whether directly or indirectly. This prescribed threshold appears arbitrary.

Indirect Promoter holdings

While the definition of promoter includes direct and indirect holdings, it is unclear how to calculate the 10% threshold in cases of indirect holdings. For example, if an investor directly holds 5% in an unlisted company and also owns 25% in a Promoter Holding Company, which itself holds 20% in an unlisted company, will such investor be considered a promoter of the unlisted company? One can reference the calculation methods used under the Companies Act and SEBI Regulations.

There are also complexities in interpreting the definition of Promoter when a direct holding is by an entity with a tax-transparent status—such as certain Alternative Investment Funds (‘AIF’)—especially given that the statutory language uses the terms ‘directly’ or ‘indirectly.’

Set off of allowable capital losses and computation of additional tax

When additional tax is levied on Promoters on buyback-related Capital Gains, a key question is whether this tax should be calculated on the net gains from buyback or on the net gains after adjusting available capital losses. Generally, the Income-tax Act allows brought forward capital losses as well as losses incurred during the year to be set off against capital gains, but it is unclear whether this general rule applies to a specific, transaction-linked levy like additional tax related to buyback. If additional tax is interpreted as a standalone charge on the gains arising from that particular transaction, then brought forward/current year losses may not reduce the taxable Capital Gains. Alternatively, if the gains from buyback are treated like any other Capital gains under the Act, taxpayers may argue that set off of losses should be permitted. The outcome often depends on the wording of the specific provision, legislative intent, and how tax authorities interpret the nature of the levy. Given this ambiguity, clear guidance from the government would help ensure consistent tax treatment for investors.

Buyback in case of Private Equity Funds

A Private Equity Fund set up as an AIF pools capital from multiple unitholders and typically deploys such funds into unlisted companies. Given that the AIF exercises control over its underlying investments and not the unitholders, a view may be taken that an AIF may be regarded as a ‘Promoter’. However, since an AIF is a tax-transparent entity for the purpose of capital gains and they are chargeable to tax in the hands of its unitholders, the question of who should bear the additional tax liability becomes an important point for consideration.

Buyback under Tax Treaty

As per the existing law, the characterisation of income as Dividends or Capital Gains was a challenge for shareholders eligible for Tax Treaty benefits since, under the domestic law, the buyback proceeds are deemed dividend and the cost of acquisition is allowed to be claimed as a capital loss. There was a possibility of litigation due to the anomaly in classifying the buyback of shares under two heads of income.

The proposed amendment to treat buyback of shares as will simplify the taxability under the Tax Treaty. Capital gains under the OECD Model Convention includes ‘alienation’ of any property, including shares. The phrase ‘alienation of property’ is used to cover, inter- alia, extinguishment of any rights in a capital asset. Accordingly, buy-back of shares should constitute alienation of property and accordingly be subject to tax as capital gains under the Tax Treaty.

Further, many of India’s tax treaties state that capital gains should be calculated according to the domestic tax laws of the country where the income arises. In such cases, the classification of income will primarily follow how it is treated under domestic law. Since the domestic law is now being aligned with the Tax Treaty, it will be easier to justify that such gains are in the nature of Capital Gains.

For Non-resident shareholders who invested before April 2017, the benefit of grandfathering should apply wherever the relevant Tax Treaty allows it. However, this benefit will remain subject to the General Anti-Avoidance Rules (‘GAAR’) scrutiny. One is yet to see if the benefit of grandfathering will be extended to the additional tax payable by the Promoters.

Concluding remarks

The amendment has been largely welcomed, as it aims to ease the burden on small shareholders. It also marks a shift toward taxing investors on their actual net gains rather than on gross receipts classified as dividend income, with losses dealt with separately—effectively aligning the levy with real income. Yet, for many investors, the larger issue remains unchanged: after years of shifting rules around buyback taxation, what the market is seeking most is clarity and long term certainty.

Disclaimer

The aforesaid article contains personal views of the authors. This material and the information contained herein is of a general nature and is not intended to address specific issues of any person. Any person acting on the basis of this material or information shall do so solely at his own risk. JMP Advisors Pvt Ltd shall not be liable for any loss whatsoever sustained by any person who relies on this material or information.

[1] The SEBI (Buy-Back of Securities) Regulations, 2018 refer to the definition of ‘Promoter’ under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, which in turn refers to the definition of a ‘Promoter’ under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.