Tax Treatment of Share Buybacks (Under the Income-tax Act, 2025)


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Tax Treatment of Share Buybacks (Under the Income-tax Act, 2025)
Category: Income Tax, Posted on: 07/07/2026 , Posted By: Mamta

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We frequently hear about share buybacks in the news. Recently, companies like Rolex Rings Ltd., Bajaj Auto Ltd., Wipro Ltd., and Patel Integrated Logistics Ltd. Etc. have all announced buyback programs.

While the mechanics of a buyback are straightforward, the main question for investors is: What is the tax treatment under the new Income-tax Act, 2025?

If you are looking to understand the latest tax implications, you are in the right place. Here is a simplified breakdown of how buybacks are taxed today.

1. In the Hands of the Company

There is no tax treatment in the hands of the company. The previous Buyback Distribution Tax (BDT) that companies had to pay has been abolished.

2. In the Hands of the Shareholder

As per Section 69 of the Income-tax Act, 2025, the buyback is treated as an "extinguishment of rights." Therefore, the proceeds are taxable as Capital Gains in the hands of the shareholder.

Normal Computation of Capital Gains:

Full Value of Consideration: (The Buyback Price received)

Less: Cost of Acquisition: (The original purchase price of the shares)

= Short-Term (STCG) or Long-Term Capital Gain (LTCG)

For the average retail investor, you simply pay the standard capital gains tax rate on your actual profit.

3. The Main Twist: What if the Shareholder is a Promoter?

While retail investors get relief, the government introduced a strict check for company founders and promoters to prevent tax avoidance.

When a company buys back shares under Section 68 of the Companies Act, 2013, and the shareholder tendering the shares is a Promoter, an Additional Income Tax is levied on the capital gains. This ensures promoters pay a higher effective tax rate as per below tax rates:

Capital Gain Type

Rate where the promoter is a Domestic Company

Rate where the promoter is Other than a Domestic Company

STCG (U/S 196)

2%

10%

LTCG (U/S 197 or 198)

9.5%

17.5%

Important Note: A Surcharge of 12% and a Health & Education Cess (HEC) of 4% are applicable on top of these additional taxes.

4. Practical Case Study: Taxation for a Promoter

Let’s understand this with a practical scenario involving a promoter.

The Scenario:

Mr. Akash acquired 1,000 shares of RAM & Sons Ltd. at ₹50 per share during the Financial Year 2020-21. He holds more than a 10% stake in the company, classifying him as a Promoter.

On December 10, 2026, RAM & Sons Ltd. buys back 300 of his shares at ₹120 per share. What will be the tax treatment in the hands of Mr. Akash?

Solution:

Since the shares were held for more than 12/24 months, the profit will be classified as a Long-Term Capital Gain (LTCG). Because Mr. Akash is an individual promoter (i.e., "Other than a Domestic Company"), he is liable to pay the standard LTCG tax plus an additional income tax of 17.5%.

A) Computation of Capital Gain on Buyback

Particulars

Amount (₹)

Full Value of Consideration (300 shares × ₹120)

36,000

Less: Cost of Acquisition (300 shares × ₹50)

15,000

Long-Term Capital Gain (LTCG)

21,000

B) Computation of Tax Payable

Particulars

Amount (₹)

Tax on LTCG (@ 12.5%)

2,625

Additional Income Tax (@ 17.5% as per Sec 197/198)

3,675

Total Tax Payable (Excluding Surcharge and HEC)

6,300

Important Note: A Surcharge of 12% and a Health & Education Cess (HEC) of 4% are applicable on Rs. 3675 of these additional taxes.

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