Last reviewed: 17 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April 2026, are the third distinct regime in under two years, and most articles you will find online still describe an outdated phase, usually the one that ran from October 2024 to March 2026.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 a worked example, 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 / Finance Act 2026, the deemed-dividend characterisation is removed. Ordinary capital gains treatment applies: sale consideration minus cost of acquisition, at 12.5% if long-term (holding period over 24 months) or the applicable short-term rate otherwise. A separate additional tax layer applies specifically 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.
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. Here is how the tax outcome differs purely because of when the buyback happens — the facts of the investment are identical in all three columns.
| Item | Phase 1 (pre-Oct 2024) | Phase 2 (Oct 2024 – Mar 2026) | Phase 3 (from Apr 2026) |
|---|---|---|---|
| Buyback proceeds received | ₹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) |
| 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 | Capital gain of ₹7,00,000 (₹12,00,000 − ₹5,00,000), taxed at 12.5% if long-term |
| 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 | Pays tax only on the ₹7,00,000 gain; if long-term, roughly ₹87,500 tax at 12.5% |
This is illustrative only — it assumes a simple long-term holding and does not factor in surcharge, cess, the shareholder's other income, or (for a promoter) the additional layer 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 Budget 2026 did not treat all shareholders identically: press and professional commentary describe an additional tax layer that applies specifically to promoter shareholders in a buyback, on top of the standard capital gains computation described above — distinct from the treatment available to non-promoter, public shareholders in the same buyback.
We are deliberately not stating a specific percentage or rate band for this promoter-specific layer in this article. As this is a newly introduced provision under a Finance Act that has only just come into force, the precise mechanics being described across different professional sources are not yet fully consistent with each other, and we would rather point you to get the current figure confirmed for your specific transaction than risk publishing a number that turns out to be wrong or superseded. 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 accounts for the promoter-specific layer as it stands on your transaction date.
- Confirm how "promoter" is defined for this purpose in 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 Rule 11UA / DCF framework 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.
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 have an additional layer to check.
- Not distinguishing short-term from long-term holding. The 24-month threshold for long-term treatment, and the resulting rate difference, still applies under Phase 3's capital gains framework exactly as it does for an ordinary share sale.
- 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 specific advice on the additional promoter-layer tax before assuming the ordinary capital-gains treatment above applies to you as-is.
- 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 under the Income-tax Act, 2025 / Finance Act 2026. Buybacks on or after 1 April 2026 go back to ordinary capital gains treatment: consideration minus cost of acquisition, taxed at 12.5% if long-term or at slab/applicable rates if short-term. A separate additional tax layer was also introduced for promoter shareholders specifically.
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?
Not entirely. Budget 2026 / the Finance Act 2026 restored standard capital gains treatment for buybacks generally, but it layered on an additional tax that applies specifically to promoter shareholders participating in a company's buyback, over and above the ordinary capital gains computation. The exact rate structure for this promoter-specific layer is still being interpreted differently across professional commentary as the law beds in, so we are deliberately not quoting a specific percentage here. A promoter or founder considering tendering shares in a buyback should get a current, transaction-specific computation before assuming the ordinary shareholder treatment described in this article applies to them without adjustment.
Is TDS deducted on buyback proceeds under the current (Phase 3) rules?
Withholding-tax mechanics for the post-1-April-2026 capital-gains regime should be confirmed against the current provisions at the time of the transaction, since the compliance machinery around Section 194/195 was built for the Phase 2 deemed-dividend structure and has needed corresponding adjustment for the capital-gains structure. Do not assume the Phase 2 withholding rate or the Phase 2 form of reporting carries over unchanged — confirm with your advisor before the buyback 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.
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 Budget 2026 / Finance Act 2026. This is a recently changed and still-settling area of law, particularly the additional tax layer applicable to promoter shareholders, for which we have deliberately avoided quoting a specific rate pending clearer, consistent guidance. Figures, effective dates and rate bands 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.