Buyback of Shares: Concepts and Taxability

Introduction

A share buyback, or repurchase, refers to a company’s action of buying back its own shares or specified securities from existing shareholders. This reduces the total outstanding shares in the market and effectively decreases shareholders’ equity ownership. Buybacks are governed both by the Companies Act, 2013 and the Income-tax Act, 1961 (as amended).

Legal Framework under the Companies Act, 2013

The Companies Act, 2013 provides the regulatory structure for buybacks.

• Section 68(1): Sources of Buyback
  • Free Reserves
  • Securities Premium Account (premium collected on issue of shares)
  • Proceeds of New Issues (except of the same kind of shares/securities)A company may repurchase its shares or securities from the following:

Prohibition: Buyback cannot be made out of the proceeds of an earlier issue of the same class of shares or securities.

• Rule 17: Contains detailed provisions for executing buybacks.
• Applicability: Provisions apply to all companies.

Income Tax Provisions on Buyback of Shares

Pre-2013 Regime (1999–2013)

• No specific Buyback Tax (BBT) existed.
• The transaction was taxed as capital gains in the hands of shareholders.
• Many companies preferred buybacks over dividends to avoid paying Dividend Distribution Tax (DDT).

Post Finance Act, 2013 (Effective from 01.06.2013)

• Section 115QA introduced.
• Applicable initially only to unlisted companies.
• Tax on buyback: 20% (plus surcharge and cess) on distributed income.
• Distributed Income = Buyback Price – Issue Price.
• Amount received by shareholder was exempt u/s 10(34A).

Extension to Listed Companies (Finance Act (2), 2019)

• Effective from 05.07.2019, section 115QA was extended to listed companies as well.

Amendment via Finance Act (2), 2024 (Effective 01.10.2024)

A major shift in taxation of buybacks occurred:

• Section 2(22)(f)/2(40)(f) (Income-tax Act, 2025):

Any payment by a company on buyback of shares, in accordance with section 68 of the Companies Act, 2013, will now be treated as deemed dividend in the hands of shareholders.

• TDS Implication: Tax deduction at source required u/s 194/393(7) (Income-tax Act, 2025).
• Section 46A/69(2) (Income-tax Act, 2025): For buybacks on or after 01.10.2024, the consideration received by shareholders will be deemed nil for the purpose of computing capital gains.

Thus, taxation shifted from the company level to the shareholder level (dividend taxation regime).

Numerical Illustration of New Regime

• Purchase (2020): 100 shares @ ₹40 each = ₹4,000.
• Buyback (Nov 2024): 20 shares @ ₹60 each.
  • Consideration received = ₹1,200.
  • Deemed dividend = ₹1,200 (taxable in shareholder’s hands).
  • Capital Loss = ₹800 (20 × ₹40).
• Sale (2025): 50 shares @ ₹70 each.
  • Sale Value = ₹3,500.
  • Cost = ₹2,000.
  • Capital Gain = ₹1,500.
  • Set-off: Adjusted against earlier capital loss (₹800).
  • Net Taxable Capital Gain = ₹700.

Compliance and Reporting ( For ITR purpose)

• Dividend Income from buyback to be reported under “Other Sources” u/s 2(22)(f).
• Capital Losses (STCL/LTCL) arising from buybacks (post 01.10.2024) to be reported separately.
• Losses can be set off against capital gains of the same year as well as carry forward for further period.

Comparison: Buyback vs Selling in Open Market

It’s useful to compare:

• If you sell your shares in the open market, you’ll pay capital gains tax only on the gain over cost (if any), not on the full sale proceeds. Also, securities transaction tax (STT) applies, but generally overall tax burden is lower especially for higher slab rates.
• Under the buyback, you pay tax on the entire amount received, which tends to result in a higher tax liability for those in higher slabs.

Conclusion

The taxation of buybacks in India has undergone a complete transformation. Initially taxed as capital gains in the hands of shareholders, it shifted to company-level taxation under section 115QA (2013–2024). However, post 1st October 2024, the Finance Act (2), 2024 reverts taxation back to the shareholder by treating buyback proceeds as deemed dividends.

This change significantly impacts financial planning for investors and dividend distribution strategies for companies.