Buy Back Taxation – Finance Act – 2026 – Resettling the unsettled…..

In the  Finance (No 2) Act 2024, the provisions relating to buy back taxation under the Income Tax Act,1961 (‘the Act’) had undergone drastic changes. Government had sought to build a parity in taxation of buy-back and dividends since both were used as methods by the companies to distribute accumulated reserves. The erstwhile Section 115QA of the Act, mentioned about Buy back Distribution Tax (‘BDT’), wherein if any domestic company would purchase its own shares, it would be liable to pay tax on the distributed income at the rate of 20% plus surcharge @12% and cess @4% (Effective rate – 23.296%). Accordingly, the capital gains arising in the hands of the shareholders were exempt under section 10(34A) of the Act.

Amendment in the Finance Act (No.2), 2024

Section 115QA of the Act was abolished in the Finance Act (No. 2), 2024 and taxability was shifted from the companies to the shareholders for any buy back on or after 01.10.2024. In response to the amendment in section 115QA, sections 10(34A), 46A,2(22), 57 and 194 of the Act were also amended. The exemption under section 10(34A) has now been removed for any buy back on or after 01^st Oct 2024.The Finance Act (No.2), 2024 brought in a new clause (f) under section 2(22) of the Act, which states that the consideration received by the shareholders on buyback will be considered as dividend in their hands and shall be taxable as per the applicable regular tax rates. No expenses would be allowed as deduction under section 57 of the Act from such dividend income. The amount of consideration shall be liable to withholding tax under section 194 of the Act as a dividend. Further, the consideration under the head capital gains is to be considered as NIL as per section 46A of the Act and the cost of acquisition will be allowed as a deduction, thus resulting in a loss under the head capital gains.

Thus, the whole buy-back regime was revamped, and new provisions of taxability were made effective.

This had posed some challenges in the hands of the shareholders. The very main concern faced by the shareholders was taxability of the whole consideration as dividend income while the cost of acquisition was allowed as deduction under the head capital gains. Hence, this resulted in a loss under the head capital gains. As per the provisions of the Act, losses under the head capital gains can be set off only against income under the head capital gains. So, if an assessee does not have any income under the head capital gains, he may not be able to set off this loss ever.

Further, the consideration shall be taxable under the head other sources in the hands of the shareholders, and the tax shall be computed at the regular tax rate applicable. They have to pay tax as per the applicable slab rates that may be 30% as opposed to the rate of 20% BDT. Even post the amendments in sections 111A,112 and 112A of the Act the capital gains are to be taxed at the rate 20%, 12.5% and 12.5% respectively. However, none of these shall be applicable in this case.

Let us take an example to understand the situation –

A company issued 20,000 shares at a price of INR 30 per share (FV – INR 10) on 08^th April 2020. Subsequently in May 2025, the company bought back 15,000 shares out of them at a price of INR 35 per share. Now in this case the company is paying INR 5(INR 35-30) per share of buy back premium. As per the erstwhile provisions, the company would have paid tax under section 115QA of the Act on INR 5 per share.

However, post the Finance Act(No.2),2024, the amount of INR 5,25,000 (35*15000) shall be taxable as dividend and INR 4,50,000(15000*30) will be allowed as capital loss in the hands of the shareholder.

Further, if the shareholder is a non-resident, another issue arises as to which Article of Double Taxation Avoidance Agreement (‘DTAA’) should be referred to. So, whether one should look at the Article for Dividends as it is taxable as a dividend as per the Act, or should we be looking at the Articles for Capital gains as there is a transfer of shares and capital loss under the head capital gains as per the domestic law? Thus, it requires to be analyzed critically based on the facts and circumstances of each case and basis the definitions in respective treaties.

Amendment made in the Finance Act 2026

Going through the above amended provisions, it can be observed that due to shifting the taxability of buy back to shareholders, there were certain hardships faced by the genuine shareholders in the event of buy back. Also, considering that buy back of shares was a transfer of capital asset, taxing the consideration as dividends in the hands of the shareholders was somewhere in conflict with the provisions of the Act.

Keeping all the above difficulties in mind, the Finance Act 2026 has amended the provisions related to taxation of buy back of shares.

The following paragraphs refer to the sections as per the Income-tax Act, 2025 (‘the Act 2025’) which will be applicable from 01 April 2026, along with the sections in the current Act for ease of understanding.

• Taxation as dividend removed

Under the current scenario the consideration on buy-back received is taxed as dividend under section 2(40)(f) of the Act 2025 [2(22)(f) of the Act].The said clause has been removed from the section 2 and the Finance Act 2026 has restored the taxation of buy back as capital gains under section 69 of the Act 2025 (46A of the Act), in the hands of shareholders. Thus, income taxable on the event of buy-back of shares shall be computed in the hands of shareholders as per the regular capital gains provisions of the Act 2025.

• Additional tax to be paid by the promoters

As the promoters 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.

The additional tax to be paid on buy back of shares by the promoters is as follows –

So, over and above the capital gain tax payable under section say 196 of the Act, at the rate of 20%, if the promoter is a domestic company, it will also be liable to pay tax at the rate of 2% additionally, i.e. the effective rate of tax applicable on the gain on buy back of shares will be 22%.

Thus, the promoters will face an effective tax rate of 30%, and the promoter companies an effective tax rate of 22%, on gains arising from the buy-back.

Furthermore, while passing the Finance bill, 2026 in the Lok Sabha, a reference has been inserted for surcharge applicable on additional tax payable on the buy back. It has been mentioned that a surcharge at the rate of 12% shall be levied on additional tax payable on buy-back of shares, irrespective of the amount of the total income.

The Finance Act, 2026 also clarifies the applicability of the additional tax. It has amended the section 69 of the Act 2025 (section 46A of the Act), to the effect that the provisions of additional tax on promoters shall be applicable only if the buy back is done as per the provisions of section 68 of the Companies Act, 2013.

Thus, in cases where the buyback is not done under Section 68 of the Companies Act, 2013, the capital gains will continue to be computed and taxed under Section 69, but the additional tax in such cases may not be payable under this provision.

• Who is a Promoter???

Now, here arises a question, that for the purposes of this section, who will be considered as a promoter. 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

Thus, the taxation of buy back has once again been drastically overhauled to somewhere settle the unsettled provisions.

• Illustration

Let us understand the application of the amended provisions by way of the illustration given above –

A company issued 20,000 shares at a price of INR 30 per share (FV – INR 10) on 08^th April 2020. Subsequently in May 2025, the company bought back 15,000 shares out of them at a price of INR 35 per share. The shares were held by Mr. Rahul.

As per Finance Act (No.2), 2024 – As mentioned above, the amount of INR 5,25,000 (35*15000) shall be taxable as dividend and INR 4,50,000(30*15000) will be allowed as capital loss in the hands of the shareholder.

As per the Finance Act 2026 – Assuming that the shareholder is a promoter, the taxation shall be as follows.

The amount of long-term capital gain amounting to INR 75,000 shall be taxable at the rate of 12.5 % (as per section 197 of the Act 2025) amounting to INR 9,375. As he is a non-corporate promoter, he shall be liable to pay additional tax at the rate of 17.5%. Thus, the additional tax shall be 13,125. Further, a surcharge of 12% on the amount of the additional tax amounting to INR 1,575 shall also be applicable.

Taxes on buy back in the hands of Rahul –

Thus, these will be the amended provisions as per the Finance Act, 2026.

Conclusion

It can be said that indeed, the amended provisions are brought in to remove the genuine hardships suffered by the shareholders and to impose a higher taxation on promoters to curb the misuse of the buy-back mechanism. The Budget 2026 buy back reforms are economically aligned and investor friendly framework. To sum up, this is a welcome move that simplifies taxation for investors.