First identify the buyback date
| Buyback period | Company and shareholder treatment | Key check |
|---|---|---|
| Before 1 October 2024 | Where section 115QA applied, the domestic company paid tax on distributed income, generally buyback consideration less the amount received on issue determined under the prescribed rules. Qualifying shareholder income was exempt under section 10(34A). | Check when the regime covered listed shares and any grandfathering; the rate was not applied to the shareholder’s acquisition cost or necessarily to gross proceeds. |
| 1 October 2024 to 31 March 2026 | For a covered purchase under Companies Act section 68, section 2(22)(f) treated gross payment as dividend. Section 46A took consideration as nil for the separate capital calculation. Section 115QA ceased to apply to covered buybacks from 1 October. | No deduction against the deemed dividend under the specific restriction in section 57. If the shares were capital assets, compute any capital loss using eligible basis and holding period. |
| From 1 April 2026 | The Finance Act, 2026 restores capital-gains treatment for buybacks under the Income-tax Act, 2025. Compute gain or loss under section 69 and the applicable computation rules. The statutory promoter additions apply to the classes of gain listed in section 69(2). | Check the transfer date, asset and section 196, 197 or 198, promoter status, cost, treaty and applicable withholding. Do not apply the 2024 deemed dividend and nil-consideration model to these buybacks. |
For the new regime, in addition to the ordinary tax on the specified gains, section 69(2) adds 2% for a domestic company promoter or 10% for another promoter on section 196 short-term gains. For the long-term gains referred to in sections 197 and 198, it adds 9.5% or 17.5%, respectively. These are additions, not stand-alone total rates. For a listed issuer use the definition in the SEBI Buy-Back of Securities Regulations; for other issuers check Companies Act section 2(69) or direct or indirect holding of more than 10%. Test the facts and relevant treaty before quoting an effective rate.
Company law checks before any tax comparison
- Check the articles, permissible sources under section 68(1), fully paid securities, and sections 68–70. For unlisted buybacks, apply the Companies (Share Capital and Debentures) Rules; for listed buybacks apply SEBI’s regulations and currently permitted routes.
- A board resolution may be used for a buyback of up to 10% of paid-up equity capital plus free reserves if the other conditions are met. Otherwise a special resolution is generally needed. The overall 25% aggregate cap and the separate annual 25% cap measured against total paid-up equity capital for equity buybacks must both be checked.
- Generally keep aggregate secured and unsecured debt no more than twice paid-up capital and free reserves after buyback, subject to any notified higher ratio. Test actual post-transaction balances. File the required solvency declaration and other documents, and check defaults and restrictions under section 70.
- Complete the buyback within one year from the authorising resolution. Check the one-year gap from closure of the preceding offer. Extinguish the repurchased securities within seven days of the last date of completion under section 68(7), using the applicable process for dematerialised securities.
- Where shares are purchased from free reserves or securities premium, transfer the applicable nominal amount to the capital redemption reserve (CRR) under section 69. Its permitted use is for fully paid bonus shares. A dividend follows section 123, including applicable distributable-profit and deposit and payment requirements.
Dividend tax, loss and withholding
An ordinary dividend does not extinguish the shares. For the October 2024–March 2026 buyback window, the statutory dividend is based on the gross payment. For example, 10,000 shares at ₹500 produces a ₹50 lakh deemed dividend in that window. The separate capital calculation uses nil consideration; use the eligible tax basis, not just accounting cost. Listed and unlisted equity normally have different holding thresholds (more than 12 or 24 months respectively for long-term status in the illustrated period). Short-term capital loss may offset eligible short- or long-term capital gain; long-term loss only eligible long-term gain. Neither can offset dividend income. Unused loss may generally carry forward for eight years with a timely loss return under the applicable rules.
Under the historical regime, check section 194 for resident recipients and section 195 for chargeable payments to non-residents, including the relevant treaty. The section 194 threshold is an exception for qualifying resident individuals, not a blanket exemption for every payee; it changed from ₹5,000 to ₹10,000 on 1 April 2025. Check aggregate amount, payment mode and year. For the new buyback capital-gains regime, assess withholding separately; ordinary dividend withholding does not automatically apply to capital proceeds.
For section 80M, test whether the receiving domestic company has qualifying dividend income and the statutory onward distribution. The deduction is limited to the lesser of qualifying dividend income and the dividend distributed by the statutory deadline, one month before the applicable section 139(1) return due date. Do not count the same onward distribution twice. The 2026 capital gain is not dividend income for this purpose.
Seven worked cases
The transactions are hypothetical. Withholding is a payment on account, not the final tax. Unless stated, the historical examples fall within the October 2024–March 2026 window.
1. ₹10 crore payment to a promoter
Assume an 80% promoter receives ₹10 crore in each alternative, with the comparison holding the recipient’s gross cash constant. A normal pro-rata dividend paying that promoter ₹10 crore would entail ₹12.50 crore total across all shareholders. On an assumed incremental dividend rate of 35.88% (30% base, 15% dividend surcharge and 4% cess), either alternative creates ₹3.588 crore dividend tax and ₹6.412 crore after-tax cash. For a November 2024 buyback only, if eligible five-year share basis is ₹2 crore, the separate long-term capital loss is ₹2 crore. If it offsets ₹2 crore of otherwise taxable property gains at a 12.5% base with the same surcharge and cess, the tax saving is ₹29.90 lakh and the comparison rises to ₹6.711 crore. Do not assume the loss is immediately usable or apply this model to an April 2026 buyback.
2. Loss with no gains to absorb it
On a December 2024 buyback paying ₹4 crore for shares acquired in 2020 with a ₹1.50 crore eligible basis, assume the incremental dividend rate is 35.88%. Dividend tax on that assumption is ₹1.4352 crore and a separate ₹1.50 crore long-term capital loss arises. If the loss return is timely and no eligible gains arise within the next eight assessment years, it expires unabsorbed.
3. Domestic corporate recipient and onward distribution
Assume a domestic company with a 40% holding receives ₹12 crore on a November 2024 buyback and has ₹3 crore eligible long-term basis. Subject to section 80M applying to the dividend income, an actual qualifying onward distribution of ₹12 crore by the section 80M deadline permits a deduction of up to ₹12 crore against that income, not a finding of nil overall tax. If it distributes only ₹9 crore on time, the limit is ₹9 crore. Track the distinct ₹3 crore long-term loss separately and document any onward withholding.
4. Proposed buyback breaches the debt ratio
Assume paid-up equity capital of ₹5 crore, free reserves of ₹10 crore and secured plus unsecured debt of ₹35 crore. The starting ratio is 2.33:1. If the modelled post-buyback statutory denominator is ₹12 crore after a ₹3 crore buyback, the ratio is 2.92:1. At that denominator permitted debt is ₹24 crore, so at least ₹11 crore reduction is needed, all else equal. The proposed buyback also exceeds the ₹1.50 crore board-only threshold; check every independent condition and recalculate reserves and debt before authorisation.
5. ₹50 crore buyback payment to a US parent
For a December 2024 buyback, domestic law deems the ₹50 crore payment dividend. If the payment qualifies under Article 10 of the India–US treaty and the beneficial owner is an eligible US company owning at least 10% of voting stock, the 15% treaty cap yields ₹7.50 crore withholding on the assumptions. The 25% figure is the other Article 10 cap, not the Indian domestic rate. If the historical domestic 20% base, 5% surcharge and 4% cess apply, the illustration gives 21.84% or ₹10.92 crore, a difference of ₹3.42 crore. Analyse treaty character and eligibility rather than assuming the domestic deeming provision settles them; obtain relevant residency, ownership and eligibility evidence.
6. Employee shares bought back by a startup
Assume a qualifying historical buyback programme of ₹2 crore, with ₹20 lakh paid to one employee for shares. If all of that payment falls in a 30% marginal bracket, no surcharge applies and cess is 4%, the incremental tax is ₹6.24 lakh. The ₹2 lakh exercise payment is not automatically the share’s tax basis. Where section 49(2AA) applies, use the fair market value taken into account for the employment perquisite. If the eligible basis is in fact ₹2 lakh, the separate capital loss is ₹2 lakh; its holding period and use depend on the facts. A genuine secondary sale to a new investor has separate capital-gains rules, including holding period and any valuation provisions.
7. A company cannot use a single annual buyback to cancel 35% of paid-up equity
Assume promoter and minority holdings of 65% and 35%. A proposed ₹7 crore buyback of the entire 35% cannot be treated as a compliant single annual section 68 equity buyback. If a compliant offer and allocation resulted in 25 of 100 equivalent shares being bought only from the minority, the promoter would hold 65 out of 75, or 86.67%. The 25% figure is a ceiling, not permission for selective allocation. If the same price per share applied, cash cost would be ₹5 crore; if the original 35 shares represented ₹2.45 crore nominal capital, 25 would represent ₹1.75 crore for an applicable CRR transfer. Check total cap, reserves, proportionate process and all other rules.
Frequently asked questions
1. Does section 115QA still apply to a post-October 2024 buyback?
Section 115QA stopped applying from 1 October 2024. Determine shareholder taxation by the date; the deemed-dividend window ended on 31 March 2026.
2. Can a capital loss offset the historical buyback dividend?
No. Use only the applicable capital-gains set-off and carry-forward rules.
3. What should a company withhold?
Check date, payment character, residency and applicable threshold, treaty or certificate. The historical 10% resident dividend rate cannot be carried across to every 2026 buyback.
4. Is an NCLT order necessary for every unlisted buyback?
A compliant section 68 buyback is distinct from a section 66 reduction, which generally involves the Tribunal. Check the applicable corporate process and filings.
5. Can the receiving company use section 80M?
Check qualifying dividend income and actual onward distribution by the special deadline. A capital gain under the new buyback regime is not a dividend.
6. What financial controls are useful?
Model reserves, post-buyback debt, nominal share value and CRR. Reconcile the share register, approvals, cash and withholding to the statutory records.