Buy-back of shares in India is regulated under Section 68 of the Companies Act, 2013, which permits companies to repurchase shares using free reserves, securities premium, or proceeds of fresh issues, subject to specified conditions and limits. The framework requires shareholder or board approval, restricts buy-back size, mandates compliance with SEBI regulations for listed companies, and prohibits repeated buy-backs within one year. The taxation regime for buy-backs has evolved significantly. Initially taxed as capital gains in shareholders’ hands, the system shifted in 2013 to company-level taxation under Section 115QA of the Income-tax Act, 1961. The Finance Act, 2024 replaced this with a deemed dividend approach taxing shareholders directly. Under the Income-tax Act, 2025, buy-back transactions are again treated as capital gains under Section 69, with additional tax implications for promoters. The framework also raises interpretational issues involving transfer pricing, fair market value substitution, and applicability of anti-abuse provisions, alongside judicial rulings on treaty benefits and taxation of corporate restructuring transactions.
Regulatory framework of buy-back
A buy-back of shares is governed by Section 68 of the Companies Act, 2013, which lays down the regulatory architecture within which companies can repurchase their own shares.
Funding sources
A company may undertake a buy-back only from the following sources:
- Free reserves
- Securities premium account
- Proceeds of a fresh issue of shares or specified securities
Restriction: A company is expressly prohibited from funding a buy-back out of proceeds of an earlier issue of the same kind of shares or securities.
Key conditions for buy-back
Some of the critical statutory conditions are:
- Buy-back must be authorised by the Articles of Association
- It requires shareholder approval through a special resolution
- Exception: Where buy-back ≤ 10% of paid-up equity capital and free reserves, Board approval suffices
- The quantum of buy-back is capped at:
- 25% of paid-up capital + free reserves
- For equity shares, the 25% limit is linked to paid-up equity capital for that financial year
- Post buy-back, the debt-equity ratio must not exceed 2:1, unless relaxed by the Central Government
- Only fully paid-up shares/securities can be bought back
- Listed companies must comply with SEBI Buy-back Regulations
- Cooling-off period: No fresh buy-back within 1 year from closure of previous offer
Time limit
The buy-back must be completed within 1 year from:
- special resolution, or
- board resolution (in case of 10% route)
Evolution of tax framework for buy-back
Pre-2013: Classical capital gains regime
Historically, buy-back was treated as a transfer, and shareholders were taxed under capital gains provisions.
2013–2024: Buy-back distribution tax regime
With the introduction of Section 115QA (Income-tax Act, 1961), taxation shifted from shareholder to company level:
- Company paid tax on “distributed income”
- Shareholders received exempt income
While this addressed certain concerns, it gave rise to:
- Tax inefficiency for foreign investors (no credit in home jurisdiction)
- Structural arbitrage, especially for promoters using buy-backs instead of dividends
2024 amendment: Deemed dividend approach
The Finance Act, 2024 replaced company-level tax with:
- Taxation of entire buy-back proceeds as dividend
- Taxability in hands of shareholder at applicable slab rates
At the same time, the law recognised extinguishment of shares:
- Sale consideration deemed NIL
- Cost allowed as capital loss
Buy-back taxation under the Income-tax Act, 2025
Section 69 (Section 46A of ITA 1961)
Under Section 69(1) of ITA 2025, buy-back is treated as a capital gains transaction, with tax computed as the difference between consideration received and cost of acquisition.
Special regime for promoters (Section 69(2))
Post recognizing influence of promoters in the decision making process for structuring of buy-backs, ITA 2025 introduces an additional tax layer for buy-back by promoters. Effective tax outcome (Excluding surcharge and cess) for promoter and non-promoters would be as per the below table:
| Nature of Gains | Non-Promoter | Promoter (Domestic Company) | Promoter (Not a Domestic Company) |
| Short-term capital gain on listed shares | 20% | 22% [20% + additional 2% as per 69(2)] | 30% [20% + additional 10% as per 69(2)] |
| Short-term capital gain on unlisted shares | Slab rates/applicable rates | Slab rates/applicable rates | Slab rates/applicable rates |
| Long-term capital gain on listed/unlisted shares | 12.5% | 22% [12.5% + additional 9.5% as per 69(2)] | 30% [12.5% + additional 17.5% as per 69(2)] |
Definition of “Promoter” for this purpose borrows meaning from SEBI (Buy-back of securities) Regulations, or Companies Act 2013 or is a person who holds directly or indirectly, more than 10% shareholding in the company.
Implication for non-residents
For investors in jurisdictions like Mauritius/Singapore, treaty benefits (specifically for pre-2017 investments) may be explored subject to (1) treaty eligibility and (2) limitation of benefits / GAAR considerations.
Key interpretational issues under the new regime
1. Applicability of Transfer Pricing provisions
- Since buy-back is now taxed as capital gains, as per provision Section 69 of ITA, the same will be subject to Section 72 (Section 48 of ITA 1961) i.e. mode of computation of capital gains
- Accordingly, principles for computation of “full value of consideration” might apply
The above may raise the question whether transfer pricing provisions will apply in case of buy-back of shares from Associated Enterprises?
- If yes, there is no clear methodology to determine arm’s length buy-back price
2. Applicability of deemed FMV provisions (Section 79 of ITA 2025 / Section 50CA of ITA 1961)
Given the computation mechanism refers to general capital gains framework:
- Tax authorities may apply FMV substitution provisions
- Especially where buy-back price is below fair value
Counter-point:
- Absence of specific computation rules for buy-back valuation
- Buy-back pricing is governed by separate regulatory frameworks and commercial considerations
3. Applicability of Section 92(2)(m) of ITA 2025 (Section 56(2)(x) of ITA 1961)
- A conceptual issue arises whether buy-back refers to an “acquisition” of property by the company?
- A stronger view is buy-back is capital reduction, not asset acquisition. Hence, FMV mismatch provisions should not apply
Above position has been recently held by Delhi High Court in case of Globe Capital Market Ltd. [IT Appeal No. 364 of 2024]
Judicial principles on buy-back
- PQR Gmbh (AAR – Mumbai) A.A.R. No. 1195 of 2011 and Acciona Wind Energy (P.) Ltd. [2020] 180 ITD 792 (Bangalore – Trib.)
Special provision under section 46A of ITA 1961 (69 of ITA 2025) would prevail over general provision of section 45 of ITA 1961 (67 of ITA 2025) read with section 47(iv) of ITA 1961 (70(c) of ITA 2025); share buy-back transaction is taxable under section 46A and exemption under section 47(iv) is not eligible
Where assessee, a Netherlands company, derived capital gains arising from buy-back of shares by its Indian subsidiary, such transaction being transfer of shares within same corporate group constituting corporate reorganisation, such gains were taxable only in Netherlands under Article 13(5) of India–Netherlands DTAA and hence not taxable in India
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