Share Buyback Taxation in India: All Three Regimes Explained (FY 2025-26 and FY 2026-27)

Share buyback taxation in India has changed three times in the span of eighteen months. The pre-October 2024 framework, the October 2024 deemed dividend change, and the April 2026 capital gains restoration under Finance Act 2026 each produce materially different tax outcomes for the same transaction. Understanding which regime applies to your buyback participation, and what the tax mechanics are in each, is essential before tendering shares in any offer.

This article covers all three regimes in full: the rules, the section references, worked examples for each, a direct comparison, and what changes based on whether you are a retail investor or a promoter.

What Is a Share Buyback?

A share buyback is a corporate action where a company repurchases its own equity shares from existing shareholders. The company pays shareholders a price, typically at a premium to the prevailing market price, and the repurchased shares are extinguished, reducing the total number of shares outstanding.

Companies conduct buybacks for several reasons: to return surplus cash to shareholders, to signal that management believes the stock is undervalued, to improve earnings per share by reducing share count, and historically in India, to provide shareholders with a more tax-efficient exit compared to dividends. Whether buybacks are more tax-efficient than dividends or open-market sales depends entirely on the applicable regime and the investor's tax profile.

Two Routes for Buybacks

Three Regimes at a Glance

Regime 1: Until 30 September 2024

Under the framework that applied until 30 September 2024, the company bore the entire tax liability on a share buyback. The shareholder received the proceeds completely free of any further tax obligation in their hands.

How It Worked

• The domestic company paid a special buyback tax under Section 115QA at 20% on the distributed income. Distributed income was defined as the consideration paid to shareholders on buyback less the amount originally received by the company at the time of issuing those shares (the issue price). With surcharge at 12% and health and education cess at 4%, the effective tax rate at company level was approximately 23.296%.
• The entire amount received by shareholders on the buyback was exempt in their hands under Section 10(34A). No capital gains tax, no income tax.
• From the company's perspective, the buyback tax was paid within 14 days of the buyback payment date.

Regime 2: 1 October 2024 to 31 March 2026 (FY 2025-26)

The Finance (No. 2) Act, 2024 made a fundamental change effective 1 October 2024. The buyback tax at company level was abolished, and the tax burden was shifted entirely to the shareholder. The mechanism used was the deemed dividend route.

The Three-Part Mechanics

TDS Mechanics Under Regime 2

Since buyback proceeds are treated as deemed dividend, the company is required to deduct tax at source on payment. For resident individual shareholders, TDS under Section 194 applies at 10% where the total dividend (including deemed dividend from buyback) paid to the shareholder during the financial year exceeds ₹10,000 (revised threshold from April 1, 2025). For non-resident shareholders, TDS under Section 195 applies at rates in force or applicable treaty rates, subject to documentation including Tax Residency Certificate and PAN. Form 15G or 15H may be submitted by eligible resident shareholders to avoid TDS where total income is below the taxable threshold.

Regime 3: From 1 April 2026 (FY 2026-27 Onwards)

Budget 2026, enacted via Finance Act 2026, reversed the 2024 deemed dividend characterisation and restored capital gains treatment for buybacks. This is effective from 1 April 2026 and applies to FY 2026-27 onwards. It is not a return to the pre-October 2024 regime either. No company-level Section 115QA tax comes back. Instead, the shareholder pays tax on the actual gain, but promoters face an additional differential levy.

Capital Gains Treatment for All Shareholders

From 1 April 2026, buyback consideration received by any shareholder is chargeable to tax under the head "Capital Gains." The computation is exactly as it would be for a normal share sale:

• Capital gain = Buyback price received minus cost of acquisition of shares tendered.
• If shares were held for more than 12 months (listed shares): taxed as LTCG at 12.5% above the ₹1.25 lakh annual exemption under Section 112A.
• If shares were held for 12 months or less: taxed as STCG at 20% under Section 111A.
• Cost of acquisition is fully deductible in the same computation. There is no separate capital loss anymore. It is integrated into the capital gains calculation.

Promoter Additional Buyback Tax

To prevent buybacks from being used as a lower-tax exit route by promoters, Finance Act 2026 introduced a differential tax rate specifically for promoters. Promoters pay normal capital gains tax plus an additional buyback tax, resulting in the following effective rates:

A flat 12% surcharge applies specifically on the additional income-tax payable by promoters on buyback gains. This surcharge applies only to the additional tax component, not to normal capital gains tax on the same income.

Who Is a Promoter for This Purpose?

For listed companies, promoter is defined as per Regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018. For unlisted companies, promoter includes: a promoter as defined in Section 2(69) of the Companies Act, 2013, or a person holding directly or indirectly more than 10% shareholding in the company.

Three-Regime Comparison: Same Transaction, Different Tax Outcomes

The table below shows how a retail investor (non-promoter) in the 30% slab, who bought shares at ₹100 and received ₹300 in a buyback (held more than 12 months), would be taxed under each regime. Surcharge and cess excluded for clarity.

Worked Examples

Example 1: Retail Investor Under Regime 2 (FY 2025-26)

An individual investor (non-promoter, 30% slab) purchased 500 shares at ₹200 each (total cost: ₹1,00,000) and participates in a company buyback at ₹350 per share (total proceeds: ₹1,75,000). Shares were held for more than 12 months. Buyback payment received in December 2025.

If the investor also had ₹1,00,000 in LTCG from other equity sales in FY 2025-26, the capital loss could be set off against that, saving approximately ₹12,500 in additional tax (at 12.5% LTCG rate). The dividend tax of ₹52,500 remains regardless.

Example 2: Retail Investor Under Regime 3 (FY 2026-27)

Same investor, same shares (₹200 cost, 500 shares), same buyback price of ₹350. Now the buyback payment is received in June 2026, governed by Regime 3.

The same transaction that attracted ₹52,500 tax under Regime 2 attracts nil tax under Regime 3 for this investor, because the actual gain of ₹75,000 falls within the annual LTCG exemption. Even above ₹1.25 lakh, the tax would be 12.5% on the excess gain only, a substantially lower outcome than Regime 2.

Example 3: Corporate Promoter Under Regime 3 (FY 2026-27)

A domestic company (promoter) holds 10,000 shares purchased at ₹100 each (total cost: ₹10,00,000) and participates in a buyback at ₹300 per share (total proceeds: ₹30,00,000). Shares held for more than 12 months.

Buyback Participation vs Open Market Sale: Post-Tax Comparison

A shareholder holding shares in a company that announces a buyback has a choice: tender in the buyback offer or sell the same shares on the stock exchange. Under Regimes 1 and 3, the comparison is relatively straightforward. Under Regime 2, it is more nuanced because of the split treatment.

Under Regime 2 (FY 2025-26): Buyback vs Market Sale

Under Regime 3 (FY 2026-27): Buyback vs Market Sale

Under Regime 3, buyback and open market sale are taxed under the same capital gains framework. The post-tax outcome is broadly equivalent for non-promoters. The main practical difference is the buyback price: companies typically offer a premium to market price in a tender offer. A buyback at ₹350 when market is at ₹320 produces a higher absolute gain than a market sale, taxed at the same rate.

How to Report Buyback Income in Your ITR

Under Regime 2 (Buybacks with payment received between 1 October 2024 and 31 March 2026)

• Report the full buyback proceeds received under the head "Income from Other Sources" as deemed dividend in the relevant schedule of your ITR.
• Report the capital loss (cost of acquisition of shares tendered) in the capital gains schedule under the appropriate asset category. The capital loss is a short-term or long-term capital loss depending on the holding period of the shares tendered.
• The ITR form used depends on your other income sources. If you have capital gains, ITR-2 or ITR-3 (if business income exists) applies. ITR-1 cannot be used where capital losses are being reported.
• TDS deducted by the company under Section 194 or Section 195 will appear in Form 26AS. Verify the credit before filing.

Under Regime 3 (Buybacks with payment received from 1 April 2026)

• Report the entire transaction in the capital gains schedule of the ITR. The computation is: buyback proceeds minus cost of acquisition equals capital gain or capital loss.
• Classify as short-term or long-term based on holding period from purchase date to buyback payment date.
• For listed shares held more than 12 months, report under the Section 112A schedule (equity LTCG).
• For promoters, the additional buyback tax will also need to be accounted for. Guidance on the specific ITR schedules applicable will follow from CBDT notifications as the new ITR forms are released for FY 2026-27.

FAQs

1. Which buyback tax regime applies to me right now?

The regime is determined by the date the buyback payment was received, not the date of announcement. Payments received between 1 October 2024 and 31 March 2026 fall under Regime 2 (deemed dividend at slab rate). Payments received from 1 April 2026 onwards fall under Regime 3 (capital gains). Payments received before 1 October 2024 fell under Regime 1 (exempt in shareholder's hands).

2. Under Regime 2, can I deduct my share cost from the buyback proceeds before paying tax?

No. Under Regime 2, the entire buyback proceeds are taxed as deemed dividend with no deduction for cost of acquisition against that income. The cost of acquisition arises separately as a capital loss under amended Section 46A. This capital loss can only be set off against other capital gains and cannot reduce the deemed dividend income from the same buyback.

3. Is the buyback capital loss from Regime 2 wasted if I have no other capital gains?

Not necessarily. The capital loss can be carried forward for up to 8 assessment years, provided the ITR for the year the loss arose was filed on time. It can be used to offset capital gains in any of those future years, subject to normal set-off rules: short-term capital loss can offset both STCG and LTCG; long-term capital loss can only offset LTCG.

4. Under Regime 3, is a promoter always taxed at 22% or 30% on buyback gains?

These are the effective rates after the additional buyback tax is applied. Non-promoter shareholders pay standard capital gains rates: 12.5% LTCG or 20% STCG on listed shares. The promoter differential applies only to those who meet the promoter definition under the SEBI Buyback Regulations (for listed companies) or the Companies Act definition or above-10% shareholder threshold (for unlisted companies). Consult a qualified Chartered Accountant if you are uncertain about your promoter status.

5. Is TDS deducted on buyback proceeds?

Under Regime 2 (October 2024 to March 2026): yes, the company deducts TDS as the proceeds are treated as deemed dividend. Under Section 194, TDS at 10% applies where the total dividend paid to the shareholder during the financial year exceeds ₹10,000. Under Regime 3 (from April 2026): standard TDS rules for capital gains apply. TDS is generally not deducted by the company on capital gains payable to resident investors (unlike the dividend TDS position under Regime 2). Non-resident shareholders face TDS under Section 195 in both regimes, with treaty benefits available subject to documentation.

6. If I participate in a buyback under Regime 2 and also sell shares on the market in the same year, can the buyback capital loss offset my market sale capital gains?

Yes. The capital loss from the buyback (your share cost under amended Section 46A) and the capital gains from open-market sales are both in the capital gains head and can be set off against each other. Short-term capital loss from the buyback can offset both STCG and LTCG from market sales. Long-term capital loss can only offset LTCG. Please consult a SEBI-registered investment adviser or qualified Chartered Accountant to verify the specific set-off available in your situation.

7. Which ITR form should I file if I participated in a buyback?

Under Regime 2, the buyback proceeds appear as dividend income and the capital loss appears in the capital gains schedule. This combination requires ITR-2 for salaried individuals or ITR-3 if business income also exists. ITR-1 cannot be used. Under Regime 3, the buyback is purely a capital gains transaction. ITR-2 applies for salaried individuals with capital gains; ITR-3 if business income is also present.

Disclaimer: This article is for general information and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities or financial instruments. Buyback tax rules described here are based on the Finance (No. 2) Act, 2024, Finance Act 2026, and publicly available Income Tax Department guidance. The three-regime framework applies based on the date of buyback payment. Rules may change in subsequent budgets or notifications. Worked examples are simplified illustrations and exclude surcharge, cess, and other nuances. Please consult a SEBI-registered investment adviser or qualified Chartered Accountant before making any investment or tax filing decision. Equity investments are subject to market risks.