Buy-Back of Shares Taxation Before & After Income-tax Act, 2025: Complete Analysis

Buy-back of Shares in India: Taxability Before and After the Income-tax Act, 2025– Complete Analysis

The taxation of buy-back of shares in India has undergone one of the most significant changes in recent years. Until 30th September 2024, the company undertaking the buy-back was liable to pay buy-back tax, while the shareholder enjoyed complete exemption from tax. Thereafter, from 1st October 2024, the Government shifted the tax burden entirely to the shareholder by treating the buy-back proceeds as dividend. However, this regime remained in force only till 31st March 2026.

With the introduction of the Income-tax Act, 2025, effective from 1st April 2026, the taxation of buy-back has once again been rationalized by bringing it back under the Capital Gains regime for ordinary shareholders.

In this article, we shall study the taxation of buy-back of shares in India, understand the rationale behind these changes, discuss practical examples and analyse the implications for companies and shareholders.

What is Buy-back of Shares?

Buy-back of shares refers to the purchase by a company of its own shares from the existing shareholders in accordance with the provisions of the Companies Act, 2013.

Companies generally undertake buy-back for several reasons such as:

• Improving Earnings Per Share (EPS).
• Increasing shareholders’ value.
• Optimising capital structure.
• Utilizing Surplus Cash: Instead of paying dividends, companies use extra cash to buy back shares.
• Increase Promoter holding

Taxability of Buy-back of Shares up to 30th September 2024

Prior to 1st October 2024, the Income-tax Act, 1961 contained a separate taxation mechanism for buy-back transactions.

Under this regime, the tax liability was imposed on the company and not on the shareholder.

Taxability in the hands of the Company

As per Section 115QA of the Income-tax Act, 1961, every domestic company undertaking buy-back of shares was required to pay additional income-tax @ 20% on the distributed income arising on buy-back.

The tax was payable by the company irrespective of whether the shares were listed or unlisted.

Accordingly,

• Company paid Buy-back Tax.

Shareholder did not pay any tax. The amount received by the shareholder on buy-back was exempt under Section 10(34A) of the Income-tax Act, 1961.

Taxability of Buy-back from 1st October 2024 to 31st March 2026

The Finance Act, 2024 completely changed the taxation framework for buy-back of shares.

The buy-back tax under Section 115QA was abolished and the tax burden shifted from the company to the shareholder.

This regime applied to every buy-back undertaken on or after 1st October 2024 but before 1st April 2026.

Taxability in the hands of the Company

The company was no longer liable to pay Tax on buy-back i.e. buy-back tax.

Accordingly,

• Section 115QA ceased to apply.
• No additional income-tax was payable by the company.

Taxability in the hands of the Shareholder

The taxation on buy-back of shares shifted entirely to the shareholder.

The entire consideration received by the shareholder on buy-back was treated as Deemed Dividend u/s 2 (22)(f) and taxed under the head Income from Other Sources.

Also, the shareholder was not permitted to deduct the cost of acquisition while computing dividend income.

Therefore, the whole consideration for buy-back of shares became taxable in the hands of the shareholders as dividend.

However, since the shares got extinguished and ceased to exist, cost of acquisition for purchase of shares was allowed as cost of acquisition for the purpose of computation of income under the head capital gains. Also, through amendment, the consideration for the purpose of computation of income under the head capital gains was deemed as NIL resulting in Capital Loss to the assessee.

Therefore, Taxability of buy backs made on or after 1st October 2024 till 31st March’2026 for the shareholders was as under:

• Consideration received for buy back = Deemed dividend taxable under the head Income from Other Sources
• Income (Loss) under the head CG = NIL – cost of acquisition of shares bought back

This regime of taxation is applicable for buy backs made till 31.03.2026 i.e. including for the returns to be filed this year for AY 2026-27 till 31^st July/31^st August/31^st October’2026 as the case may be.

Let us understand this with the help of an example

Suppose:

Cost of acquisition of shares = ₹10,00,000

Buy-back consideration received = ₹25,00,000

The taxation for buy-back made on or after 01.10.2024 till 31.03.2026 is as follows:

Dividend Income in the hands of the shareholders: ₹25,00,000

Entire amount is taxable as dividend and no deduction for cost of acquisition from dividend income.

What happens to the Cost of Acquisition?

One of the biggest concerns under this regime was that the shareholder had already invested money for purchasing the shares.

To address this issue, the law provided that while computing Capital Gains, the sale consideration shall be deemed to be Nil.

Consequently, Cost of acquisition remained allowable.

Therefore,

Capital Loss = Cost of acquisition

In the above example,

Sale Consideration (deemed) = Nil

Cost = ₹10,00,000

Capital Loss = ₹10,00,000

This capital loss could thereafter be set-off or carried forward in accordance with the normal provisions relating to capital losses as per the Income Tax Act.

Practical implication

Although the shareholder obtained a capital loss, he still had to pay tax on the entire buy-back consideration as dividend and the same was taxable at the rates applicable to the shareholder i.e slab rates in case of individuals/HUF and applicable tax rates for companies.

This resulted in a mismatch because the dividend income was taxed immediately whereas the capital loss could be utilised only against eligible capital gains. It also resulted in higher taxes due to higher rate of taxes on dividend income and as capital losses could be adjusted only against capital gains which were taxed at lower rates.

Consequently, buy-back became an unpopular way for distribution of surplus funds to the shareholders by companies.

Taxability of Buy-back under the Income-tax Act, 2025 (Effective from 1st April 2026)

Recognising the practical difficulties faced under the dividend regime, the Government has once again changed the taxation framework for buy-back under the Income Tax Act’2025 through the Finance Act’2026.

Amendment in Section 69 and section 2(40)(f) of the Income-tax Act’2025 restores buy-back taxation to the Capital Gains regime for ordinary shareholders including promoters.

Taxability in the hands of the Company

The company is not liable to pay any tax on buy-back of its own shares.

Taxability in the hands of the Shareholder

From the shareholders point of view, buy back of shares is taxed as Capital Gains and cost of acquisition is allowed as a deduction while computing the Income under the head Capital gains.

The taxable capital gain shall be computed as:

Capital Gain= Consideration received for buy back – Cost of Acquisition

Thus, unlike the earlier regime,

• Cost of acquisition is fully deductible.
• Only the real economic gain is taxed.
• There is no taxation of the entire consideration.
• Income is chargeable to tax in the year in which the company undertakes the buy-back

Example

Suppose:

Cost of acquisition = ₹10,00,000

Buy-back consideration = ₹25,00,000

The taxable capital gain shall be:

Accordingly, tax shall be payable only on ₹15,00,000 on long-term or short-term capital gains as per the period of holding of the shares bought back.

For buybacks on or after 1st April 2026, the applicable tax rate depends on how long the shareholder held the stocks:

• Long-term: 12.5% capital gains tax for listed as well as unlisted shares.
• Short-term: 20% capital gains tax for listed shares and applicable slab rates in case of unlisted shares.

Additional tax to be paid by the promoters:

Another key change made by the Finance Act’2026 is the additional Tax to be paid by the promoters on buy-back of shares by a company. As the promoters can generally influence corporate decision making, especially in case of buy back, an additional tax is to be paid by the promoters over and above the tax on the capital gains.

Frequently Asked Questions (FAQs)

Q. Is buy-back of shares taxable in the hands of the company under the Income-tax Act, 2025?

Ans: No. The company is not liable to pay any buy-back tax under the Income-tax Act, 2025.

Q. Whether Buy-back is taxable as Dividend under the Income-tax Act, 2025?

Ans: No, under the Income-tax Act, 2025 buy-back consideration received by a shareholder is not treated as dividend.

Instead, the shareholder is taxed under the normal Capital Gains provisions as explained above.

This eliminates the anomaly created under the earlier regime where the entire consideration became taxable irrespective of the actual gain earned by the shareholder.

Q. Can the shareholder claim deduction of cost of acquisition?

Ans: Yes. The shareholder is entitled to deduct the cost of acquisition while computing Capital Gains under the Income-tax Act, 2025 on buy-back made on or after 01^st April’2026.

Q. Which regime was more beneficial for shareholders?

Ans: From a shareholder’s perspective, the regime applicable from 1st April 2026 is considerably more rational because only the actual gain is subjected to tax.

Q. Who is a promoter?

Ans: As per section 69 of the Act 2025, promoter shall mean – In case of listed companies – As defined in regulation 2(k) of the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992.

In any other case – 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

Conclusion

With the coming into force of the Income-tax Act, 2025 from 1st April 2026, the law has once again been rationalised. By restoring the Capital Gains regime for ordinary shareholders, the Act ensures that tax is levied only on the actual economic gain earned by the shareholder rather than on the gross consideration received. This approach aligns the taxation of buy-back with fundamental principles of income taxation and provides greater certainty to taxpayers and businesses alike.

Taxpayers, companies and professionals should therefore carefully determine the date of buy-back, as the tax implications differ significantly depending upon whether the transaction was undertaken between 1st October 2024 and 31st March 2026, or on or after 1st April 2026. A correct understanding of the applicable regime is essential for accurate tax computation, reporting and compliance.

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(The author is a Chartered Accountant and can be contacted at info@youronlinefilings.in or capratikanand@gmail.com or Mobile: +91-9953199493)