Last reviewed: 25 September 2026. Buyback of shares taxation has changed again — the rules that apply to a buyback happening today, on or after 1 April 2026, are the third distinct regime in under two years, and most articles you will find online still describe an outdated phase, usually the one that ran from October 2024 to March 2026. If you are relying on something you read six months ago, or on how a buyback was taxed for a friend or a colleague last year, it is very likely describing a regime that no longer applies. This article lays out all three phases side by side, with worked examples, so you can see exactly which one governs your situation.
The three-phase story: why "how is a buyback taxed" doesn't have one answer
Buyback taxation in India has been rewritten twice in under two years, and which regime applies depends entirely on when the buyback happened — not when you file the return, and not what regime was in force when you originally bought the shares. Confusing these three windows is now the single most common source of errors we see in buyback taxation, whether that's a shareholder over- or under-reporting income, or a company getting the compliance trail wrong.
| Phase | Period | Who is taxed, and how | Shareholder's receipt |
|---|---|---|---|
| Phase 1 | Up to 30 September 2024 | The company paid Buyback Distribution Tax under Section 115QA, at an effective rate of roughly 23.3% (including surcharge and cess) on the distributed income. | Tax-free in the shareholder's hands under Section 10(34A). |
| Phase 2 | 1 October 2024 – 31 March 2026 | The Finance (No. 2) Act, 2024 shifted the entire liability to the shareholder: the full buyback consideration was treated as deemed dividend under Section 2(22)(f), taxed at slab rate (or the applicable rate for non-residents), with no deduction for cost of acquisition against that income. The company withheld tax at 10% for residents / 20% for non-residents under Section 194/195. | Fully taxable as dividend; cost of acquisition became a notional capital loss, carried forward for set-off against other capital gains. |
| Phase 3 (current) | 1 April 2026 onward | Under the Income-tax Act, 2025 as amended by the Finance Act 2026, the deemed-dividend characterisation is removed. Ordinary capital gains treatment applies under section 69 (old 46A): sale consideration minus cost of acquisition, taxed at 12.5% if long-term — over 12 months for listed shares (gains above ₹1.25 lakh in the year taxable, section 198, old 112A) or over 24 months for unlisted shares — or at the applicable short-term rate otherwise (section 196, old 111A, for listed shares). An additional tax applies to promoter shareholders — see the dedicated section below. | Taxed only on the actual gain, with full cost-of-acquisition deduction restored. |
Phase 2 caused real hardship precisely because it did not distinguish between a shareholder with a small actual gain and one with almost none: a long-time investor with a high cost base and only a modest real profit was taxed as though the entire buyback proceeds were dividend income, with the cost recovered only as a capital loss carried into future years — useful only if and when there was other capital gains income to set it against. Phase 3 corrects this by returning to a gain-based computation for ordinary shareholders.
Sections under the Income-tax Act, 2025 for Phase 3 buybacks: section 69 (old 46A) for capital gains on buyback; section 196 (old 111A) for short-term gains on listed shares; section 198 (old 112A) for long-term gains on listed shares; section 393(2) (old 195) for withholding on payments to non-residents. The 1961 sections cited for Phases 1 and 2 remain correct for those periods. The Act as first enacted carried the Phase 2 deemed-dividend approach forward; the Finance Act 2026 replaced it with the capital gains treatment described here, so check any computation against the amended text.
Worked example: the same buyback under all three regimes
Consider an investor who bought shares for a total cost of ₹5,00,000 and receives ₹12,00,000 in a company buyback, holding the shares long-term. Here is how the tax outcome differs purely because of when the buyback happens — and, in Phase 3, whether the shares are listed or unlisted.
| Item | Phase 1 (pre-Oct 2024) | Phase 2 (Oct 2024 – Mar 2026) | Phase 3: listed shares (held over 12 months) | Phase 3: unlisted shares (held over 24 months) |
|---|---|---|---|---|
| Buyback proceeds received | ₹12,00,000 | ₹12,00,000 | ₹12,00,000 | ₹12,00,000 |
| Cost of acquisition | ₹5,00,000 (irrelevant to shareholder tax) | ₹5,00,000 (not deductible against dividend income) | ₹5,00,000 (fully deductible) | ₹5,00,000 (fully deductible) |
| What is taxed, and to whom | Company pays ~23.3% effective tax on distributed income under Sec 115QA | Full ₹12,00,000 taxed as deemed dividend in the shareholder's hands, at slab rate | Gain ₹7,00,000, less the ₹1,25,000 annual exemption (if unused) = ₹5,75,000 taxable at 12.5% | Gain ₹7,00,000 taxable at 12.5%; no ₹1.25 lakh exemption |
| Shareholder's own outcome | Receives ₹12,00,000 tax-free | Pays slab-rate tax on ₹12,00,000 as dividend; the ₹5,00,000 cost becomes a capital loss carried forward for future set-off | Tax of ₹71,875 before surcharge and cess | Tax of ₹87,500 before surcharge and cess |
This is illustrative only — it assumes a simple long-term holding, that the listed-share exemption has not been used on other gains in the year, and does not factor in surcharge, cess, the shareholder's other income, or (for a promoter) the additional tax discussed next. It is not drawn from any client's actual transaction.
What promoter shareholders should specifically check before a 2026 buyback
The return to capital gains treatment in Phase 3 is genuinely better news for an ordinary or public shareholder than the Phase 2 regime it replaces. But the Finance Act 2026 did not treat all shareholders identically: it levies an additional tax on promoter shareholders who tender shares in a buyback, on top of the standard capital gains computation described above, with different rates for corporate and non-corporate promoters. This has been in force since 1 April 2026 and applies to every buyback with a record date from that day.
Because the promoter's effective rate depends on whether the promoter is a company, on the holding period and on surcharge, we compute it from the enacted provision for each transaction rather than quote a single figure here. If you are a promoter or founder considering tendering shares in a buyback:
- Do not assume the ordinary-shareholder capital gains treatment in the table above applies to you unmodified — get a computation that includes the additional promoter tax on your transaction date.
- Confirm whether you are a "promoter" for this purpose on your company's specific facts (shareholding pattern, disclosed promoter status under SEBI/Companies Act filings, etc.) before assuming it does or doesn't apply to you.
- Time the transaction and the computation together — get the advice before the buyback record date, not after, since restructuring the shareholding to change who is treated as a promoter is not something to attempt reactively.
A buyback price also has to be justified commercially and, for an unlisted company, is typically benchmarked against a fair value computation — the same valuation framework (old Rule 11UA, now the corresponding rule of the Income-tax Rules, 2026) and DCF methods used for funding rounds and ESOP grants. If you haven't looked at how that valuation is done, our guide to startup valuation methods (DCF vs NAV vs FEMA) and the broader business valuation in India 2026 guide walk through the methods and who can sign the report.
Non-resident and foreign-parent shareholders
Where a foreign parent or other non-resident tenders shares, three extra checks apply:
- Treaty rate. The capital gain is taxable in India under section 69 unless the tax treaty with the shareholder's country gives the taxing right only to that country or caps the rate. Check the capital gains article of the specific treaty.
- TRC and Form 10F. Section 159(8) of the 2025 Act (old 90(4)) requires a tax residency certificate and Form 10F (Form 41 under the 2026 Rules) before treaty relief is allowed, and the company needs them to withhold at the treaty rate under section 393(2).
- FEMA pricing. In an unlisted company's buyback, the price paid to a non-resident must meet the FEMA pricing guidelines for a transfer from a non-resident to a resident, supported by a valuation report, and the transfer must be reported.
Our foreign subsidiary accounting, CFO and FEMA team handles the pricing report, withholding and reporting for buybacks involving a foreign parent.
If you did a buyback between October 2024 and March 2026: check your ITR
Anyone who received buyback proceeds in the Phase 2 window — 1 October 2024 to 31 March 2026 — should specifically check that the return for that year reported it correctly: as deemed dividend income under Section 2(22)(f), taxed at slab rate, with the cost of acquisition of the tendered shares carried forward as a notional capital loss rather than netted against the proceeds. Given how quickly this law changed twice in quick succession, we have seen this reported incorrectly in a few common ways:
- Reporting the buyback as a capital gains transaction (netting cost against proceeds) instead of as deemed dividend on the gross amount — this understates tax payable for that year.
- Failing to separately record the capital loss arising from the cost of acquisition, so it is never available to be carried forward and set off in later years.
- Missing the TDS credit deducted by the company under Section 194/195 because it was reflected against dividend income in Form 26AS/AIS rather than expected under a capital gains head.
- For non-resident shareholders, not checking whether a lower withholding rate was available under an applicable tax treaty at the time.
If any of this sounds like your filing for AY 2025-26 or AY 2026-27 (depending on the exact date), it is worth a review — a revised return or rectification may still be available depending on the applicable time limits for the assessment year concerned.
Common mistakes in buyback taxation right now
- Applying the wrong phase's rule based on the wrong date. The governing date is the buyback's record date / the date the shares are actually bought back, not the date the company announced the buyback or the date you originally acquired the shares.
- Assuming "tax-free buyback" still applies. That was only ever true in Phase 1. It has not been true since 1 October 2024, under either Phase 2 or Phase 3.
- Treating promoters and ordinary shareholders identically in a 2026 buyback. The ordinary capital gains treatment in this article is the general rule; promoters pay an additional tax on top.
- Using the wrong holding period. Listed shares are long-term after 12 months and get the ₹1.25 lakh annual exemption; unlisted shares are long-term only after 24 months and get no such exemption.
- Forgetting the Phase 2 capital loss. If you went through a Phase 2 buyback, the notional capital loss carried forward from that year is a real asset — track it and use it against eligible capital gains before the carry-forward period lapses.
Practical takeaways
- Ordinary/public shareholder, buyback happening now: you are taxed on the capital gain, not on the gross proceeds as deemed dividend — a materially better position than Phase 2.
- Promoter/founder considering a buyback: get a computation that includes the additional promoter tax before assuming the ordinary capital-gains treatment above applies to you as-is.
- Non-resident shareholder: line up the TRC, Form 10F and, for an unlisted company, the FEMA valuation before the record date.
- Received buyback proceeds between 1 Oct 2024 and 31 Mar 2026: confirm your ITR for that year reported it as deemed dividend with a capital loss carried forward — not as a straightforward capital gain — given how common a filing error this has been.
Frequently asked questions
Is buyback of shares tax-free for the shareholder now?
No — that was true only in Phase 1, for buybacks completed before 1 October 2024, when the company paid tax under Section 115QA and the shareholder's receipt was exempt under Section 10(34A). For a buyback happening now, in FY 2026-27, the shareholder is taxed — on capital gains (sale consideration minus cost of acquisition), not on the full amount, but it is not tax-free.
What changed on 1 April 2026 for buyback taxation?
The deemed-dividend treatment introduced by the Finance (No. 2) Act, 2024 — which taxed the entire buyback consideration as dividend income in the shareholder's hands — has been withdrawn by the Finance Act 2026, and buybacks are taxed as capital gains under section 69 of the Income-tax Act, 2025 (old 46A). Buybacks on or after 1 April 2026 go back to ordinary capital gains treatment: consideration minus cost of acquisition. Long-term gains are taxed at 12.5% — for listed shares held over 12 months, with gains above ₹1.25 lakh in the year taxable (section 198, old 112A), and for unlisted shares held over 24 months. Short-term gains are taxed at the applicable short-term rate (section 196, old 111A, for listed shares). An additional tax layer applies to promoter shareholders.
I received buyback proceeds between October 2024 and March 2026 — how should that have been taxed?
That falls in Phase 2, under the now-superseded Finance (No. 2) Act, 2024 regime. The entire buyback consideration you received should have been reported as deemed dividend under Section 2(22)(f) and taxed at your slab rate (or the applicable rate for a non-resident), with tax withheld by the company at 10% (residents) or 20% (non-residents, subject to treaty relief) under Section 194 or 195. The cost of acquisition of the shares tendered does not reduce that dividend income — instead it becomes a notional capital loss you can carry forward and set off against other capital gains in future years, subject to the usual carry-forward time limits. This is a distinct computation from ordinary capital gains and is a common point where returns get filed incorrectly.
Does the cost of acquisition of my shares reduce the taxable amount in a buyback today?
For a buyback happening now (on or after 1 April 2026), yes — full cost-of-acquisition deduction is restored, exactly as in a normal share sale. This is a meaningful improvement over the Phase 2 position (1 October 2024 to 31 March 2026), where the entire proceeds were taxed as dividend with no deduction for cost, and the cost only surfaced later as a carried-forward capital loss.
Are promoter shareholders taxed the same way as other shareholders in a 2026 buyback?
No. The Finance Act 2026 restored standard capital gains treatment for buybacks generally, but it also levies an additional tax on promoter shareholders who tender shares in a buyback, over and above the ordinary capital gains computation, with different rates for corporate and non-corporate promoters. This has been law since 1 April 2026. A promoter or founder considering tendering shares should have the effective rate computed from the enacted provision, and should check whether they fall within the promoter definition used, before the buyback record date.
Is TDS deducted on buyback proceeds under the current (Phase 3) rules?
Because a buyback from 1 April 2026 is taxed as capital gains and not as a dividend, the dividend withholding that applied in Phase 2 no longer applies to it. For a non-resident shareholder, the company must withhold tax on the capital gain under section 393(2) of the Income-tax Act, 2025 (old 195), at the Act or treaty rate. For resident shareholders there is generally no withholding on capital gains from a share buyback, and the tax is paid through advance tax and the return. Confirm the position for the specific buyback before the record date.
What is the practical impact if my company is planning a buyback right now?
For the company, the compliance and disclosure trail depends on which phase the record date falls in — there is no ambiguity once you have the date, since each phase applies to a clearly bounded period. For shareholders in a buyback happening today, the headline change is favourable versus Phase 2: capital gains treatment with full cost deduction, rather than deemed dividend on the gross amount. Promoter shareholders and anyone who also has open positions from the Phase 2 window should treat this as a fact-specific computation, not a one-line assumption, and route it through us before the buyback closes.
How is a non-resident or foreign parent company taxed on a buyback?
A non-resident shareholder is taxed on the capital gain in India under section 69 of the Income-tax Act, 2025, unless the applicable tax treaty gives the right to tax the gain only to the country of residence or a lower rate. To claim treaty relief it must give the company a tax residency certificate and Form 10F (Form 41 under the Income-tax Rules, 2026), as required by section 159(8). In an unlisted company's buyback, the price paid to a non-resident must also meet the FEMA pricing guidelines, backed by a valuation report.
Buyback taxation has changed twice in under two years and the rules depend on the exact date of the transaction. We help companies and shareholders — including promoters — work out which regime applies and file it correctly.
Valuation & Share Transaction Advisory Income Tax Filing Talk to usThis article summarises the general position on buyback of shares taxation as understood on the review date above, based on the Finance (No. 2) Act, 2024, the Income-tax Act, 2025 and the Finance Act 2026. The additional tax on promoter shareholders is computed from the enacted provision for each transaction and is not quoted as a single rate here. Figures, effective dates and rates should be independently confirmed against the law as it stands on your actual transaction date before you rely on them, and this is general information, not advice for any specific transaction — please consult us with your facts.