Evolution of Buyback Taxation in India:

Companies primarily resort to two methods to reward their shareholders: (a) by paying dividends and (b) by repurchasing its own shares from shareholders.

Buyback of shares is the activity wherein the Company repurchases its own shares from the existing shareholders.

Buyback tax was first introduced in the year 2013 for unlisted companies to distribute its accumulated reserves. It was then extended to listed companies as well in year 2019.

Earlier, when a listed entity used to declare dividends, Companies were liable to pay Dividend Distribution Tax (DDT). But when the amount was distributed to the shareholders by way of buy-back of shares, then the taxability was in the hands of shareholders in the form of capital gains taxable at a lower rate. There was no taxability in the hands of the company for the buyback of shares.

As it was taxable as capital gains in the hands of shareholders, the tax thereon was applicable at a lower rate on the buyback of shares as the applicable Capital gain tax rates were lower. Also, not all the shareholders have income more than the basic exemption limit.

Therefore, as an anti-tax avoidance measure, Section 115QA was introduced under the ITA vide the Finance Act, 2013, w.e.f. June 1, 2013  for unlisted companies, and with effect from 5th July, 2019, the same became applicable for the buyback of shares by listed companies as well.

Buyback Tax Regime w.e.f. June 1, 2013 till September 30, 2024

Section 115QA of the ITA introduced w.e.f. June 1, 2013 contains provisions for taxation of a domestic company in respect of buy-back of shares (within the meaning of Sec. 68 of the Companies Act). In effect, the incidence of tax stands shifted completely to the Company and not the recipient of the buyback proceeds.

Section 10(34A) of the ITA provided for exemption to a shareholder in respect of income arising from buyback of shares w.e.f. April 1, 2014 (i.e., Assessment year 2014-15). The Finance Act (No. 2), 2019 has also made consequential changes to section 10(34A) of the ITA extending the benefit of exemption of income from buy-back to shareholders in respect of shares listed on recognized stock exchange as well.

While the income arising to the shareholder on account of buy back of shares as referred to in section 115QA of the ITA is exempt from tax under the provisions of the amended section 10(34A) with effect from July 5, 2019 in the hands of a Non-resident as well, the same may be subject to tax in the country of residence of the shareholder as per the provisions of the tax laws of that country.

Given that income arising on account of the buy-back of shares is exempt from tax under Section 10(34A) of ITA, the same is not subject to tax deduction at source for resident/ non-resident shareholders.

Buyback Tax Regime w.e.f. October 1, 2024

With effect from 01st October 2024, below changes were made in the buyback tax provisions:

1. Consideration received by the shareholders on account of buy back of shares is taxed in the hands of the shareholders as dividend income and shall be charged to income-tax at applicable rates.
2. Cost of acquisition of the shares extinguished on buy-back is considered as a capital loss for the shareholders, which is eligible for setoff against any other capital gain.
3. TDS provisions applicable on payments to shareholders. Domestic company is required to withhold tax at 10% from payment to resident shareholders.

Changes proposed in Union Budget 2026-27:

With effect from 01st April 2026, below changes are proposed in the buyback tax provisions:

1. It is proposed to rationalize the taxation of share buy-backs by providing that consideration received on buy-back shall be chargeable to tax under the head Capital gains instead of being treated as dividend income.
2. In the case of promoters, the effective tax liability on gains arising from buy-back shall be 30%, comprising tax payable at the applicable rates together with an additional tax. In case of promoter companies, the effective tax liability will be 22%.

These amendments will take effect from the 1st day of April, 2026, and will accordingly apply to any buy-back of shares that takes place on or after this date.

Implications on Retail Shareholders and Promoters:

From the retail shareholders perspective, with the proposed changes in treatment of buyback in the hands of shareholders as Capital gains rather than Dividend has brought fairer tax treatment in line with sale of shares in open market. At present, buyback amounts were treated as dividends and taxed at individual slab rates with no deductions but with the proposed changes, only capital gains (consideration received from buyback less cost of acquisition of the shares) will be taxed @12.5% or 20% depending on the period of holding. This will effectively translates into lowing the tax burden for retail shareholders compared with higher slab rate on the entire buyback amount.

From the Promoters perspective, with the proposed changes in treatment of buyback in the hands of Promoters/ Promoter companies as Capital gains has also somewhat fairer tax treatment as against taxing it as Dividend income. At present, buyback amounts were treated as dividends and taxed at maximum marginal tax rate with no deductions but with the proposed changes, only capital gains (consideration received from buyback less cost of acquisition of the shares) will be taxed @30% and 22% for Individual promoters and corporate promoters respectively. This is proposed to be achieved by levy of an additional tax over and above capital gains tax, so as to align the effective tax burden to the specified rate.

Concluding Remarks:

Aligning buyback taxation with capital gains principles is a welcome move, considering that shares are capital assets and buybacks result in extinguishment of shareholders’ rights. Treating such transactions at par with sale of shares in the open market ensures equity, certainty, and economic neutrality in tax policy. The Budget 2026 proposals restore conceptual consistency while simultaneously addressing concerns of tax arbitrage. Reclassification of the tax on buybacks is positive and once again makes it a more competitive option for shareholders return. This should make companies more willing to return capital through this route.

(The view expressed are the personal views and does not constitute any advisory or opinion)