If you've been an investor in any large-cap Indian company over the last decade, you've probably participated in a buyback. Wipro. Infosys. TCS. Indus Towers. They were one of the most tax-efficient ways to take cash out of a profitable business — for the company, for the promoter, and for retail shareholders alike.
That world ended on 1 October 2024.
This article walks through what changed, why it changed, the exact math under the new regime versus the old one, and — most importantly — what it means for you as a retail investor the next time you see a buyback announcement in your inbox.
A note before we begin. This article explains the law as it stands today and is educational, not personalised tax advice. Your specific outcome depends on your tax slab, holding period, and whether you have other capital gains to absorb the resulting capital loss. Please consult a qualified chartered accountant or tax advisor before tendering shares in any buyback.
First, What Exactly Is a Share Buyback?
A share buyback is exactly what it sounds like — a company purchasing its own shares from existing shareholders. Imagine a friend who borrowed money from ten people, did well in business, and decides to return some of that capital. A buyback is the corporate version of that.
Companies do this for a few reasons. They might have excess cash sitting on their balance sheet that they don't have growth investments for. They want to reward shareholders. They want to signal to the market that they think their own stock is undervalued. By reducing the number of shares outstanding, a buyback also mechanically boosts earnings per share — the same profits divided across fewer shares.
SEBI's buyback regulations historically recognised three routes: tender offer, stock-exchange (open-market) purchase, and book-building. The stock-exchange route is being phased out — SEBI does not allow it for buybacks after 1 April 2025. For retail investors today, the route you'll almost always encounter is the tender offer:
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The main route · Tender Offer
Company invites eligible shareholders to tender
The company announces it will buy back, say, 2% of its shares at a fixed price. If you held shares on the record date, you can tender yours through your broker during the buyback window. This is the route used by Infosys, TCS, Wipro, Indus Towers and most large-cap buybacks. The price is usually above the prevailing market price.
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Phased out · Stock Exchange
Open-market purchase
The company purchased its own shares directly from the exchange over weeks or months. SEBI has discontinued this route for buybacks initiated after 1 April 2025, so you can effectively forget about it for new decisions.
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Rare in practice · Book-Building
Price discovery via bidding
Eligible shareholders bid within a price range and the cut-off is set based on demand. Permitted under SEBI regulations but very rarely used by Indian companies. You'll likely never encounter one as a retail investor.
Whichever route, the tax outcome for the shareholder used to be remarkably attractive — until the Finance (No. 2) Act, 2024 changed everything.
The big shiftThe Old Rule vs The New Rule
The cleanest way to understand what changed is to look at who pays the tax. The amount of money you receive in a buyback hasn't changed. What changed is the tax bill — who pays it, and how much.
Company Paid the Tax
Under Section 115QA, the company paid 20% buyback distribution tax (effective ~23.296% with surcharge and cess) on its distributed income — broadly, buyback price minus the amount it originally received when the shares were issued. Shareholders received the proceeds fully tax-free under Section 10(34A). This made buybacks a structurally more efficient way for companies to return cash than dividends.
You Pay the Tax
Under new Section 2(22)(f), the entire buyback amount is treated as a deemed dividend. You report it as 'Income from Other Sources' and pay tax at your slab rate. The company pays nothing. A 30% bracket shareholder ends up around 35.88% with surcharge and cess.
This is one of those quiet regulatory changes that doesn't make front-page news but completely rewires investor behaviour. The reason the government did this is straightforward — they wanted parity between dividends and buybacks. Both are ways for companies to distribute reserves. Both should be taxed similarly. Logical, but the math for individual investors is now meaningfully worse.
From 1 October 2024, the entire buyback amount — not just your gain over cost — is treated as dividend income. The capital you originally invested gets taxed too.
— The core change, in one sentenceA Worked Example: ₹1 Lakh in Buyback Proceeds
Abstract rules are abstract. Let me show you exactly what changes for a typical shareholder — using the simplest possible numbers.
Assume you bought 100 shares of a company at ₹700 a few years ago, and the company is now buying them back at ₹1,000 per share. Your total proceeds are ₹1,00,000. Let's say you're in the 30% income-tax slab.
Same Transaction, Two Tax Regimes
A 30%-slab shareholder, 100 shares, bought at ₹700, bought back at ₹1,000. Numbers rounded for clarity. Surcharge is an extra percentage levied on tax for higher incomes; cess is an additional 4% levied on total tax. Both are assumed here for income above ₹50 lakh.
The old way — company paid
- Buyback proceeds received₹1,00,000
- Tax in shareholder's handsNil
- Net in your bank₹1,00,000
- Company-level 115QA tax (paid by company; base is buyback price minus amount originally received by company on issue, not your purchase cost)Borne by company
The new way — you pay
- Buyback proceeds received₹1,00,000
- Deemed dividend (entire amount)₹1,00,000
- Tax at slab (assume 30% + surcharge + cess ≈ 35.88%)~₹35,880
- Notional capital loss available (your cost)₹70,000
The change is stark. Under the old regime, you got ₹1,00,000 in your bank and the company handled the tax with the exchequer. Under the new regime, the same ₹1,00,000 receipt becomes deemed-dividend income and you write a tax cheque for roughly a third of it (at 30% slab with surcharge). And remember — this is on the entire amount, not just the gain. The ₹70,000 you put in years ago is being taxed as if it were dividend income.
The legislative quirk that makes this hurt is the deeming fiction. Under Section 2(22)(f), all of the buyback amount is treated as a dividend — not just the premium over your cost. There's no carve-out for capital you originally invested. The capital loss provision (more on that below) helps to a point, but for most retail investors, it doesn't fully neutralise the tax.
Should You Tender or Sell in the Market?
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Indicative only. Assumes LTCG at 12.5% beyond the ₹1.25 lakh annual exemption per the Budget 2024 rules; STCG at 20%. Cess of 4% applied to all slab-rate computations. Capital loss can only be set off against capital gains — not against the deemed-dividend income itself. Always confirm with a qualified CA before acting.
A Quick History of Buyback Taxation in India
To really understand why this change happened, it helps to see the full arc. India's buyback tax law has been amended four times in a quarter-century — each amendment closing one loophole and inadvertently opening another.
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1999 · Section 46A introduced
Buyback proceeds taxed as capital gains
The Finance Act, 1999 inserted Section 46A. Buyback proceeds were taxed as capital gains in the shareholder's hands — long-term or short-term based on holding period. Dividends were separately taxable under the dividend-distribution-tax regime. This was fair, simple, and worked for two decades.
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2013 · Section 115QA introduced
Company-level buyback tax on unlisted firms
Companies — especially unlisted ones — were increasingly using buybacks to distribute reserves and avoid the Dividend Distribution Tax. To plug this, the Finance Act, 2013 introduced Section 115QA: a 20% buyback distribution tax on the difference between buyback price and original issue price, payable by the company. Initially this applied only to unlisted firms.
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2019 · Extended to listed companies
The 115QA net widens
The Finance (No. 2) Act, 2019 extended Section 115QA to listed companies as well. From this point, all buybacks — listed or unlisted — were taxed at the company level. Shareholders continued to receive proceeds tax-free under Section 10(34A). This is the regime most retail investors got familiar with.
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2020 · DDT abolished
The arbitrage opens up
The Finance Act, 2020 abolished Dividend Distribution Tax. Dividends became taxable directly in the shareholder's hands at their slab rate. But buyback proceeds remained tax-free for shareholders (company paid 115QA tax). Suddenly, for high-bracket investors and promoters, buybacks were structurally more tax-efficient than dividends. This is the arbitrage the 2024 amendment closed.
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1 Oct 2024 · The flip
Section 115QA repealed, Section 2(22)(f) inserted
The Finance (No. 2) Act, 2024 repealed Section 115QA for buybacks on or after 1 October 2024. The exemption under Section 10(34A) was withdrawn. A new clause (f) was inserted in Section 2(22) treating the entire buyback amount as deemed dividend. Tax now lands squarely in the shareholder's hands — at slab rates.
The cut-off date matters. Buybacks completed on or before 30 September 2024 follow the old regime — company pays 115QA, you receive proceeds tax-free. Buybacks on or after 1 October 2024 follow the new regime. This is why several large companies — including Indus Towers (Aug 2024) — rushed to complete their buybacks before the deadline.
Who Gets Hit Hardest by the New Rule?
The new regime doesn't treat all shareholders equally. Your tax bracket determines how much you actually keep. Here's how the same buyback hits four different shareholder profiles.
Notice the asymmetry. Small retail investors in lower slabs feel the change least. The most affected category is salaried professionals in the 30% bracket — many of whom have made tendering buybacks a regular part of their investing strategy.
Promoters, who often own large stakes and were heavy users of buybacks to extract value without dividend tax, are also hit hard. This isn't accidental — closing that promoter-arbitrage was one of the unstated objectives of the change.
The partial offsetThe Capital Loss — A Partial Silver Lining
Here's the one piece of good news. While the buyback amount is taxed as dividend income, the tax law also gives you a notional capital loss to play with.
Under Section 46A (the provision that defines how capital gains are computed when shares are bought back), the sale consideration for capital gains purposes is deemed to be NIL. So for the example above — shares bought at ₹700, bought back at ₹1,000 — your capital gains computation looks like this: sale value of zero, cost of acquisition ₹70,000, result a capital loss of ₹70,000.
That loss is real and usable. Specifically:
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Year 1 · Current year set-off
Set off against other capital gains
You can adjust this notional capital loss against other capital gains in the same year — selling another stock at a profit, mutual fund redemptions, gold, property. Short-term losses can offset both short-term and long-term gains. Long-term losses can only offset long-term gains.
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Years 2–8 · Carry forward
Up to 8 years of carry-forward
If you don't have enough capital gains in the current year to absorb the loss, you can carry it forward for up to 8 assessment years and set it off against future capital gains. File your ITR on time to preserve this — late filing under Section 139(3) can disqualify the carry-forward.
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Can't set off against
The deemed dividend itself
The catch: this capital loss cannot be set off against the deemed-dividend income from the buyback itself. Sections 70, 71 and 74 restrict capital losses to set-off against capital gains only — not income from other sources. So if you have no other capital gains, you're paying full tax on the dividend with no offset.
The capital loss is most valuable to active investors who routinely have capital gains across the portfolio. For a retiree holding only one stock, the loss is essentially worthless — there's nothing to set it off against, and after 8 years it lapses.
Should You Even Tender in a Buyback Now?
This is the question every investor needs to ask the next time they get a buyback letter from their company. The answer is no longer the automatic 'yes' it was before October 2024.
The decision now depends on three things working together:
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Factor 1 · Your tax slab
The higher your slab, the worse the math
If you're in the 5% or 20% slab, the new rule isn't catastrophic — tendering may still make sense if the buyback price is meaningfully above market. If you're in the 30% bracket, you're handing over a third of the proceeds. Run the post-tax number, not the headline price.
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Factor 2 · The buyback premium
How much above market is the buyback?
If the buyback price is 25–30% above current market, the tax hit may still leave you better off than selling on the exchange. If the premium is only 5–10%, the after-tax outcome from tendering may be worse than just selling normally and paying long-term capital gains tax at 12.5%.
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Factor 3 · Your other capital gains
Can the capital loss find a home?
If you have other capital gains the loss can offset, the after-tax outcome of tendering improves significantly. If you have no other gains — or those gains are years away — the capital loss may sit unused. Investors who actively rebalance benefit more from the new regime than buy-and-hold holders.
The general framework: for high-bracket investors, the alternative of simply selling on the exchange is now often more efficient than tendering. You'd pay 12.5% long-term capital gains tax on the profit (₹30,000 in our example = ₹3,750 tax) versus ~35.88% on the entire ₹1,00,000 if you tender.
For retail investors specifically, there's another wrinkle worth knowing. SEBI's buyback regulations reserve 15% of the buyback for small shareholders (holding shares of market value up to ₹2 lakh). This used to be a big retail perk under the old regime. Under the new regime, this perk is largely neutralised by the tax change — small shareholders in low slabs benefit less than they used to, and small shareholders in high slabs are actively penalised.
Screener lets you filter for cash-rich, low-debt, high-promoter-holding companies — the kind that historically run buybacks. Useful both for spotting the next likely buyback candidate, and for re-evaluating whether to hold or tender if one already lands in your portfolio.
Non-Resident Shareholders — What Changed
For NRIs holding shares of Indian companies, the new regime adds a layer of treaty complexity. TDS (Tax Deducted at Source) is the tax the company withholds before sending you the money. Section 195 governs TDS for non-residents and the company will deduct tax at 'rates in force' — but the effective rate depends entirely on the Double Taxation Avoidance Agreement (DTAA) — a tax treaty between India and another country to prevent the same income being taxed twice — between India and your country of residence.
The interpretation hinges on how the buyback consideration is characterised under your treaty:
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Article on Dividend
Treaty rate on dividend income
If your treaty treats this as dividend, TDS applies at the rate specified in the treaty — typically 10% or 15% for most countries. Bring your Tax Residency Certificate (TRC) and Form 10F.
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Article on Capital Gains
Treaty treatment of capital gains
Some treaties (notably with Mauritius, Singapore historically) provided capital-gains exemption for certain holdings. Whether buyback proceeds can be argued as capital gains under such treaties is a live legal question post-2024, and depends on the specific treaty language.
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Article on Business Profits
If shares are stock-in-trade
For non-residents holding the shares as stock-in-trade rather than investment, the proceeds may fall under 'business profits' — and the answer depends on whether there's a permanent establishment in India.
The bottom line for NRIs — get specific tax advice for your treaty before tendering. The Indian company will deduct TDS based on its own interpretation; reclaiming the difference is a separate process.
FAQsCommon Questions on the New Buyback Tax
A few questions come up repeatedly when investors hear about this change. Here are direct answers.
When did the new buyback tax rule take effect in India?
The new buyback tax rules took effect from 1 October 2024. Any share buyback by an Indian company that took place on or after this date is governed by the new regime — the entire buyback amount received by the shareholder is treated as deemed dividend and taxed at the shareholder's applicable slab rate. Buybacks completed on or before 30 September 2024 still fall under the older Section 115QA regime where the company paid the tax.
How is buyback amount taxed in the hands of shareholders now?
Under Section 2(22)(f) of the Income Tax Act, the entire buyback consideration — not just the gain over your cost — is treated as deemed dividend. It is reported under 'Income from Other Sources' and taxed at your applicable income tax slab rate. No deduction is allowed against this income under Section 57. For resident individual shareholders, Section 194 TDS applies at 10% if the aggregate dividend payments from that company exceed ₹10,000 in the financial year (the threshold was ₹5,000 before April 2025). This is only TDS — not the final tax. The final tax still depends on your applicable slab rate, with the TDS adjustable when you file your return.
What happens to my cost of acquisition after the buyback?
For capital gains purposes under Section 46A, the sale consideration is deemed to be NIL. This creates a notional capital loss equal to your full cost of acquisition. The loss is short-term or long-term depending on your holding period (12 months for listed shares, 24 months for unlisted). It can be set off against other capital gains in the same year or carried forward for 8 assessment years, but it cannot be used to reduce the deemed-dividend income itself.
Is the new buyback tax worse than the old regime?
For most retail investors in higher tax brackets, yes. Under the old regime, the company paid roughly 23.296% buyback distribution tax and shareholders received the proceeds tax-free. Under the new regime, a shareholder in the 30% slab pays around 35.88% (with surcharge and cess) on the full buyback amount. The capital loss provision helps somewhat, but only if you have other capital gains to set it off against.
Should I participate in a buyback after October 2024?
It depends on three things: your tax bracket, the buyback premium over the current market price, and whether you have capital gains to absorb the resulting capital loss. Investors in the 30%+ slab may find tendering far less attractive than they did before — selling on the open market and paying long-term capital gains tax can be cheaper. Always run the after-tax math for your specific bracket before tendering.
How are non-resident shareholders (NRIs) taxed on buyback proceeds?
For non-resident shareholders, the buyback proceeds are also treated as deemed dividend. The company deducts TDS under Section 195 at the rates in force, subject to the applicable Double Taxation Avoidance Agreement (DTAA) between India and the shareholder's country of residence. The exact treaty rate depends on whether the buyback consideration is characterised as dividend, capital gains, or business profits under the relevant DTAA.
Should You Tender or Sell? — 3 quick questions
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The Bottom Line
The October 2024 amendment closed what had become India's most attractive corporate-action loophole. Buybacks are no longer a tax-free distribution channel for shareholders. The full amount is taxed at your slab rate, with a partial capital-loss offset that helps active investors more than passive ones.
For retail investors, the practical takeaway is straightforward: when the next buyback letter arrives, don't just look at the buyback price. Run the after-tax math for your specific tax bracket, factor in whether you have capital gains to absorb the loss, and compare against simply selling on the exchange. The reflex answer of "always tender" no longer holds.
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