If you’ve held shares in a company that’s done a buyback recently, or you’re a promoter weighing whether to structure one, you’ve probably noticed the tax treatment keeps changing. That’s not your imagination. In under three years, India has run through three different ways of taxing share buybacks. The latest one, effective 1st April 2026 under the Income-tax Act, 2025, brings back capital gains taxation — and for most shareholders, that’s genuinely good news.
Let’s walk through what changed, why it matters, and what it means for your next transaction.
First, a Quick Recap: How We Got Here
To understand why the current rule feels like a relief, it helps to see what came before it.
Before October 2024: The company paid the tax, not you. Under Section 115QA of the old Income-tax Act, 1961, the company undertaking the buyback paid a flat tax (roughly 20% plus surcharge and cess) on the difference between the buyback price and the issue price of the shares. Shareholders received their payout completely tax-free. Simple, but it also meant even shareholders who’d never touched their shares got a “free” exit.
1st October 2024 to 31st March 2026: The tax burden flipped entirely onto the shareholder. The Finance (No. 2) Act, 2024 said that the entire buyback consideration you received would be treated as a deemed dividend and taxed at your applicable slab rate. Worse, the cost you’d originally paid to acquire those shares wasn’t deducted from this dividend income — instead, it was recorded as a separate capital loss, which could only be set off against other capital gains, not against the dividend income itself.
Here’s why that stung. Say you bought a share for ₹900 and it got bought back at ₹1,000. Your real, economic gain was ₹100. But under this rule, the entire ₹1,000 was taxed as dividend income at your slab rate — which could be 30% or higher — while the ₹900 you’d spent just sat there as a capital loss you might never fully use. For many high-net-worth shareholders and promoters, this made buybacks far more expensive than a simple market sale.
What Changes From 1st April 2026
The Income-tax Act, 2025 fixes this through a new provision — Section 69 — and it does two things at once.
1. Buybacks go back to being taxed as capital gains. The deemed dividend treatment is gone. Now, when your shares are bought back, you’re taxed only on the actual gain: buyback consideration minus your cost of acquisition. Nothing more.
Using the same example: shares bought at ₹900, bought back at ₹1,000. Your taxable gain is ₹100 — not ₹1,000. If you’ve held the shares for more than 12 months (for listed companies), that ₹100 is taxed as long-term capital gains at 12.5%. If it’s a short-term holding, short-term capital gains rates apply instead.
2. Companies still don’t pay tax on the buyback itself. That part hasn’t changed — the tax liability sits with the shareholder, just calculated more sensibly now.
3. A new “promoter tax” has been added. This is the part that’s easy to miss. To stop promoters from using buybacks as a tax-efficient way to extract cash from their own companies (capital gains rates are usually lower than dividend tax rates), the new Act adds an additional levy specifically on promoter buybacks — 22% for corporate promoters and 30% for non-corporate promoters, on top of the regular capital gains computation. The message here is clear: ordinary shareholders get relief, but promoters extracting value from their own companies will still pay a meaningful rate.
A Worked Example
Let’s say ABC Ltd, a listed company, buys back shares at ₹1,500 per share. An investor, Priya, bought her shares two years ago at ₹800 each and tenders 1,000 shares.
- Buyback consideration: ₹15,00,000
- Cost of acquisition: ₹8,00,000
- Taxable capital gain: ₹7,00,000
- Since she’s held the shares for over 12 months, this qualifies as long-term capital gains, taxed at 12.5% (no indexation benefit under the current LTCG framework for listed equity)
- Tax payable: ₹87,500
Compare that to the October 2024–March 2026 regime, where the entire ₹15,00,000 would have been added to her income and taxed at her slab rate — potentially over ₹4,50,000 if she fell in the highest bracket, with the ₹8,00,000 cost sitting uselessly as a capital loss. The difference is significant, and it’s the reason this change matters far beyond compliance paperwork.
Who This Affects, and How
Retail and institutional shareholders benefit the most directly. You’re taxed on real economic gain, at capital gains rates that are typically lower than slab rates, and your cost of acquisition is finally recognised properly.
Promoters and founders get partial relief — capital gains treatment applies to them too — but the additional 22%/30% levy means buybacks are no longer a low-tax route to pull money out of a company they control. If you’re a founder planning an exit or partial liquidity event, it’s worth modelling both a buyback and a dividend distribution side by side before deciding which route actually costs less after this levy.
Startups and unlisted companies doing buybacks — often for cap table cleanup or to buy out an exiting co-founder — should note that the holding period and tax rates for unlisted shares differ from listed ones, so get the computation checked before finalising the price.
Companies structuring a buyback don’t face a fresh tax liability themselves, but they do need to get shareholder communication right, since the tax outcome now varies a lot depending on each shareholder’s holding period and original cost — information the company doesn’t always have visibility into.
What to Do Before Your Next Buyback
A few practical steps we’d recommend to clients:
- Pull together your original purchase records now. Cost of acquisition is central to this computation, and gaps in documentation (especially for shares held for many years, inherited shares, or shares from ESOP exercises) can inflate your taxable gain unnecessarily.
- Check your holding period carefully. The line between short-term and long-term capital gains changes your tax rate meaningfully, and the rules differ slightly for listed versus unlisted shares.
- If you’re a promoter, run the numbers both ways. Compare the post-levy buyback cost against a straightforward dividend or a private share sale before committing to a structure.
- If your shares came from ESOPs, remember you’ve likely already paid perquisite tax at the time of exercise — that becomes part of your cost of acquisition for this computation, so don’t let it get double-counted or missed.
The Bigger Picture
This is the third time India’s buyback tax rules have changed since 2024, and each version was a response to a real problem with the one before it — the pre-2024 rule let shareholders exit tax-free, the 2024 rule over-corrected and taxed the entire proceeds, and this version tries to land in the middle: tax the actual gain, but add a guardrail for promoters. Whether it stays this way is anyone’s guess, but for now, it’s a materially better outcome for anyone holding shares in a company that’s planning a buyback in FY 2026-27.
If you’re weighing a buyback — whether you’re a shareholder deciding whether to tender your shares, or a company evaluating whether a buyback makes sense as part of a larger restructuring or exit plan — it’s worth getting the computation modelled out before the transaction, not after. The numbers can move quite a bit depending on holding period, promoter status, and how the shares were originally acquired.
This article is for general informational purposes and shouldn’t be treated as tax advice for a specific transaction. Buyback tax computations depend on individual facts — holding period, promoter status, listed versus unlisted shares — so it’s best to get a proper assessment done before you finalise any buyback.