Summary: The taxation of share buybacks in India has evolved through three distinct phases. Until 1 October 2024, companies paid Buyback Distribution Tax under Section 115QA of the Income Tax Act, 1961, while shareholders enjoyed a complete exemption under Section 10(34A). From 1 October 2024 to 31 March 2026, the Finance Act, 2024 shifted the tax burden to shareholders by treating the entire buyback consideration as a deemed dividend under Section 2(22)(f), taxable at applicable rates without allowing deduction for the cost of acquisition, although the cost could be claimed as a deemed capital loss. From 1 April 2026, the Income Tax Act, 2025 restores capital gains taxation, allowing shareholders to deduct the cost of acquisition. However, promoters face an additional tax under Section 69(2), with higher rates depending on their status, and the Finance Act, 2026 further imposes a flat 12% surcharge on this additional tax component.
Phase 1: Company-Level Taxation of Buy-Back of Shares (Up to 01.10.2024)
Under the historical regime governed by Section 115QA of the Income Tax Act, 1961, the tax on share buybacks was paid entirely by the company. Companies were liable to pay a Buyback Distribution Tax on the “distributed income” (the difference between the buyback consideration and the amount received by the company upon the original issue of shares). The tax rate was 20% principal tax, plus a 12% surcharge and a 4% cess, resulting in an effective tax rate of 23.296%. To prevent double taxation, the buyback proceeds received by the shareholders were completely exempt from tax in their hands under Section 10(34A).
Phase 2: Deemed Dividend Regime (01.10.2024 to 31.03.2026)
The Finance Act, 2024 shifted the tax liability from the company to the shareholder. Under Section 2(22)(f) of the Income Tax Act, 1961, the entire buyback consideration received by the shareholder was treated as a “deemed dividend” and taxed as “Income from Other Sources” at the shareholder’s applicable slab rates (for individuals) or corporate tax rates. No deduction was allowed for the cost of acquisition against this deemed dividend income. Instead, the cost of acquisition was carried forward as a “deemed capital loss” (since the sale consideration for capital gains purposes was deemed to be NIL), which could be set off against other capital gains. Companies were required to deduct TDS at 10% for resident individuals and 20% for non-residents as per section 194.
Phase 3: Capital Gains and Promoter Surcharge Regime (On or After 01.04.2026)
Under the Income Tax Act, 2025, as amended by the Finance Act, 2026, the deemed dividend characterization of buybacks is abolished by omitting the relevant sub-clause. Buyback proceeds are restored to the capital gains framework under Section 69 of the Income Tax Act, 2025. Shareholders can now fully deduct their cost of acquisition from the buyback consideration to compute their taxable capital gains.
But now the taxability is different for a promoter and a non-promoter.
For non-promoter retail investors, standard capital gains tax rates apply (such as 12.5% for long-term capital gains and 20% for short-term capital gains). However, to prevent tax arbitrage by corporate insiders, Section 69(2) introduces an additional income tax specifically for promoters, provided the buyback is conducted in accordance with Section 68 of the Companies Act, 2013. If the transaction is a non-Section 68 transaction (such as a capital reduction or court-sanctioned acquisition), the promoter is taxed only at standard capital gains rates without the additional levy.
For domestic corporate promoters, the additional tax rate is 2% on short-term capital gains and 9.5% on long-term capital gains. For promoters other than domestic companies (such as individuals, trusts, or private equity funds holding more than 10% shareholding), the additional tax rate is 10% on short-term capital gains and 17.5% on long-term capital gains.
Furthermore, Section 2(6) of the Finance Act, 2026 has brought Section 69 of the Income Tax Act, 2025 under the list of provisions attracting a flat surcharge of 12%. This 12% surcharge is expressly applicable to the additional income tax levied under Section 69(2) on promoter buyback gains. Tax practitioners must apply this 12% surcharge on the additional tax component, which is applied separately and over and above the surcharge applicable to the regular capital gains tax computed under the standard provisions.
Conclusion
The taxation of share buybacks has transitioned from a company-level distribution tax to a shareholder-level deemed dividend tax, and finally to a capital gains tax under the Income Tax Act, 2025. While the new regime restores the deduction of the cost of acquisition for all shareholders, it implements a targeted anti-abuse mechanism for promoters. Promoters are subject to an additional tax of up to 17.5% under Section 69(2), which is further subject to a flat 12% surcharge introduced by Section 2(6) of the Finance Act, 2026, thereby ensuring tax parity with dividend distributions.
Sections to refer
1. Section 115QA and 10(34A) Income Tax Act 1961
2. Section 2(22)(f) Income Tax Act 1961
3. Section 69 Income Tax Act 2025
4. Section 196,197,198 of Income Tax Act 2025
5. Section 2(6) of the Finance Act 2026
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