Buyback Tax
Buyback Tax is the tax levied on share buybacks conducted by Indian companies; Budget 2024 shifted the tax incidence from the company (which previously paid a 20% buyback tax under Section 115QA) to shareholders, who now pay capital gains tax on buyback proceeds received.
Until July 23, 2024, share buybacks by Indian companies were taxed under Section 115QA, which levied a tax of 20% (plus surcharge and cess) on the distributed income (buyback consideration minus issue price) at the company level — similar to how DDT worked before 2020. Shareholders received buyback proceeds tax-free in their hands. This made buybacks highly tax-efficient for shareholders compared to dividends, driving a surge in Indian companies using buybacks as the preferred mode of returning capital.
Budget 2024 reversed this regime effective October 1, 2024. Buyback proceeds are now taxed as capital gains in the hands of shareholders, treating the buyback as a transfer of shares for capital gains purposes. The full buyback consideration is treated as the sale price, and the original cost of acquisition of the tendered shares is allowed as a deduction. The resulting gain is taxed as short-term or long-term capital gains depending on how long the shareholder held the shares.
For shareholders who held the tendered shares for more than 12 months, the gain qualifies as LTCG taxable at 12.5% (above the ₹1.25 lakh annual exemption). For shorter-held shares, STCG at 20% applies. This change significantly reduced the post-tax attractiveness of buybacks for high-income shareholders compared to the old regime, where the company bore the tax and shareholders received full proceeds.
A nuance introduced by the Budget 2024 amendment is that the cost of the tendered shares (which is now allowed as a deduction from the buyback proceeds) becomes a capital loss if the tender price is below the purchase price — an unlikely scenario in practice since companies typically buyback at a premium to market price. More relevantly, if the buyback price is at a significant premium to cost, the resulting capital gain may push some shareholders into higher tax brackets for the year, with implications for surcharge and advance tax.
For mutual funds and institutional investors who participate in buyback tender offers at scale, the transition to capital gains treatment also introduced TDS implications and portfolio accounting complexity. For retail investors, the key practical change is that buyback income now appears in Schedule CG of ITR-2 (or ITR-3) rather than being ignored as non-taxable, and the AIS will reflect the buyback proceeds as a capital gain transaction.