Buyback of Shares: Capital Gains Treatment and Promoter Tax (Income Tax Act 2025)
From 1 April 2026, money received from a company for buying back its own shares or other specified securities is taxed as capital gains in the shareholder's hands under section 69 of the Income Tax Act 2025. The gain is the consideration received minus the cost of acquisition, taxed in the year of the buyback. A promoter pays an additional tax on the same gain: 2% or 10% on short-term gains (those covered by section 196) and 9.5% or 17.5% on long-term gains.
This guide explains how the computation works, who counts as a promoter, and what changed from the earlier treatment. All figures are from section 69 and the related sections as amended by the Finance Act, 2026 (tax year 2026-27). This is information, not advice.
How is a buyback taxed under the Income Tax Act 2025?
Section 69(1) says that when a shareholder or holder of other specified securities receives consideration from a company for the purchase of its own shares or securities, the difference between the cost of acquisition and the value of consideration received is deemed to be capital gains. The gain arises in the year in which the company purchases the shares. The section is subject to section 72, which sets the mode of computing capital gains.
"Specified securities" has the meaning given in Explanation 1 to section 68 of the Companies Act, 2013 (section 69(3)(c)).
What changed from 1 April 2026?
Before the Finance Act, 2026, section 69 said that if the shareholder received consideration of the nature referred to in section 2(40)(f) for a buyback, the value of that consideration was deemed to be nil. Section 2(40)(f) listed, as a dividend, any payment by a company on purchase of its own shares as per section 68 of the Companies Act, 2013.
The Finance Act, 2026 omitted that sub-clause from the dividend definition with effect from 1 April 2026 and substituted sub-sections (2) and (3) of section 69. The result is that the buyback receipt is no longer a dividend. It is compared against the cost of the shares, and promoters pay the extra tax described below. For other deemed dividend rules, see our guide on deemed income and dividend.
Is the buyback gain short-term or long-term?
Section 69 does not set its own holding period. The usual definition in section 2(101) applies: a capital asset held for not more than 24 months before transfer is short-term, and for a security listed on a recognised stock exchange in India, the period is 12 months. Anything held longer is long-term (section 2(67)). The holding period of shares bought on an exchange and shares of a closely held company can therefore differ for the same time held.
Once the gain is classified, the normal rates apply. Section 197(1)(b) taxes long-term capital gains at 12.5%, and section 198 has a special rule for listed equity shares where securities transaction tax (STT) conditions are met. Check whether those conditions are met for a given buyback before applying that rule. Our guides on long-term capital gains rates and short-term capital gains cover the detail. Cost rules are in cost of acquisition and indexation.
What expenses can be deducted from a buyback gain?
Because section 69(1) works "subject to section 72", the usual computation applies. Section 72(1) lets you deduct expenditure incurred wholly and exclusively in connection with the transfer, and the cost of acquisition and cost of any improvement. Section 72(3)(b) does not allow securities transaction tax (STT) paid as a deduction. So brokerage or documentation costs of tendering the shares can reduce the gain, but STT cannot.
Does the company report buybacks to the tax department?
Yes, in one case. Under rule 237(2), Table Sl. No. 7, a company listed on a recognised stock exchange that buys back shares from any person (other than shares bought in the open market) must include it in its statement of financial transaction, in Form No. 165 under section 508(1), where the amount or value from that person is Rs 10 lakh or more in a financial year. If you tendered shares of that size, expect it to appear in your Annual Information Statement, so your return should match.
Who is a promoter for buyback tax?
| Type of company | Who is a promoter (section 69(3)) |
|---|---|
| Listed on a recognised stock exchange in India | A promoter as defined in regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018 |
| Any other company | A promoter under section 2(69) of the Companies Act, 2013, or a person who holds, directly or indirectly, more than 10% of the shareholding in the company |
What is the additional tax on a promoter?
Section 69(2) applies when the company purchases its own shares or other specified securities in accordance with section 68 of the Companies Act, 2013 and the shareholder is a promoter. The aggregate tax payable on the capital gains is the sum of:
- the income-tax payable on the gains under the other provisions of the Act; and
- an additional income-tax on the gains, at the rate in the Table below.
| Gain (section 69(2), Table) | Promoter is a domestic company | Promoter is not a domestic company |
|---|---|---|
| Short-term capital gains referred to in section 196 | 2% | 10% |
| Long-term capital gains referred to in section 197 or 198 | 9.5% | 17.5% |
How is tax on a buyback calculated? Worked examples
Example 1: non-promoter shareholder, long-term gain (tax year 2026-27)
Ravi, a resident individual, holds 500 listed shares bought at Rs 400 each. The company buys them back at Rs 1,000 each in 2026-27. He has held them for over 12 months, so the gain is long-term. Assumption: the 12.5% rate in section 197(1)(b) applies, no transfer expenses, and his other income already uses up any basic exemption.
| Step | Working | Amount (Rs) |
|---|---|---|
| Consideration received | 500 x 1,000 | 5,00,000 |
| Cost of acquisition | 500 x 400 | 2,00,000 |
| Capital gain | 5,00,000 - 2,00,000 | 3,00,000 |
| Tax at 12.5% | 3,00,000 x 12.5% | 37,500 |
Ravi is not a promoter, so no additional tax applies. Cess and surcharge are outside this example.
Example 2: promoter that is a domestic company, long-term gain
Alpha Holdings Pvt Ltd is a domestic company and a promoter of a company that buys back shares under section 68 of the Companies Act, 2013. Alpha's cost was Rs 10,00,000 and it receives Rs 60,00,000. The shares are long-term. Assumption: normal tax on the gain is at 12.5% under section 197(1)(b).
| Step | Working | Amount (Rs) |
|---|---|---|
| Capital gain | 60,00,000 - 10,00,000 | 50,00,000 |
| Normal tax at 12.5% | 50,00,000 x 12.5% | 6,25,000 |
| Additional tax at 9.5% | 50,00,000 x 9.5% | 4,75,000 |
| Total on the gain | 6,25,000 + 4,75,000 | 11,00,000 |
Example 3: individual promoter, short-term gain
Meena, a resident individual, is a promoter of a listed company. She holds shares bought for Rs 20,00,000 eight months ago. The company buys them back under section 68 of the Companies Act, 2013 for Rs 25,00,000. Listed shares held 12 months or less are short-term. Assumption: the gain is a short-term gain referred to in section 196 (listed equity shares where securities transaction tax applies), since the additional tax in the Table applies to those gains.
| Step | Working | Amount (Rs) |
|---|---|---|
| Short-term capital gain | 25,00,000 - 20,00,000 | 5,00,000 |
| Additional tax at 10% (not a domestic company, short-term) | 5,00,000 x 10% | 50,000 |
The normal tax on the Rs 5,00,000 is separate and depends on whether section 196 applies and on her other income. The Rs 50,000 is added to it.
Real-life scenarios
A minority investor. Kiran bought shares in a listed company through a broker and tenders them when the company announces a buyback. Under the new rules she computes gain against her purchase cost, the same way as any sale. Under the old rule, the consideration was treated as nil for capital gains and the receipt was a dividend instead.
A founder holding 12%. Suresh holds 12% of a private company and is also a director. The company buys back some of his shares. Because he holds more than 10% of the shareholding, he is a promoter for this purpose even if he is not named as one elsewhere (section 69(3)(b)(ii)), and the additional tax applies to his gain.
Common mistakes
- Treating the buyback receipt as a dividend. From 1 April 2026, sub-clause (f) of section 2(40) is omitted.
- Forgetting the cost of acquisition. The taxable gain is consideration minus cost, not the full amount received.
- Applying the additional tax to non-promoters. Section 69(2) is limited to promoters.
- Deducting STT from the gain. Section 72(3)(b) disallows it, while genuine transfer expenses are allowed under section 72(1)(a).
- Missing the 10% shareholding limb for unlisted companies, which can make a large shareholder a promoter.
- Using the wrong holding period. Listed securities use 12 months, others 24 months (section 2(101)).
- Reading the rates as a replacement for normal tax. The additional tax is on top of tax payable under other provisions.
Quick reference
| Point | Rule |
|---|---|
| Gain | Consideration received minus cost of acquisition (section 69(1)) |
| Year of taxation | Year in which the company purchases the shares |
| Extra tax applies to | Promoters, in buybacks under section 68 of the Companies Act, 2013 |
| Short-term additional rate | 2% (domestic company promoter), 10% (other promoter) |
| Long-term additional rate | 9.5% (domestic company promoter), 17.5% (other promoter) |
| Effective from | 1 April 2026 |
How can a CA firm keep track of this?
For a CA firm, the hard part is spotting which clients hold shares in companies announcing buybacks, and which of them are promoters. Finexo's practice management software keeps client records, tasks and deadlines in one place, so these reviews do not slip. It does not compute tax or file returns for you.
Where this is in the Act
- Section 69(1): capital gains on purchase by a company of its own shares
- Section 69(2): additional tax for promoters, with the Table of rates
- Section 69(3): meaning of promoter and specified securities
- Section 2(40): definition of dividend (sub-clause (f) omitted from 1 April 2026)
- Section 2(101): short-term capital asset and holding periods
- Section 72: mode of computation of capital gains (expenses allowed, STT not allowed)
- Rule 237(2), Table Sl. No. 7: reporting of buybacks by listed companies in Form No. 165
- Sections 196, 197, 198: rates on short-term and long-term gains
This article is general information based on the Income Tax Act 2025 as amended by the Finance Act, 2026, reviewed on 10 November 2026. It is not tax advice. Check the facts of each buyback before filing.
Frequently Asked Questions
How is a share buyback taxed for the shareholder from 1 April 2026?
The difference between the cost of acquisition and the consideration received is treated as capital gains under section 69(1) of the Income Tax Act 2025. It is taxed in the year the company buys the shares back, under the usual short-term or long-term rules.
Is buyback money still treated as a dividend?
Not from 1 April 2026. Sub-clause (f) of the definition of dividend in section 2(40), which covered payment by a company on purchase of its own shares, has been omitted by the Finance Act, 2026. Section 69 now treats the receipt as capital gains.
Who is a promoter for the extra buyback tax?
For a listed company, it is a promoter as defined in regulation 2(k) of the SEBI Buy-Back of Securities Regulations, 2018. For any other company, it is a promoter under section 2(69) of the Companies Act, 2013, or a person holding more than 10% of the shareholding, directly or indirectly (section 69(3)(b)).
What is the additional tax rate for promoters?
On short-term gains referred to in section 196 the additional rate is 2% for a domestic company promoter and 10% for any other promoter. On long-term gains referred to in section 197 or 198 it is 9.5% and 17.5% respectively (section 69(2), Table). It is on top of the normal tax on the same gains.
Does the promoter tax apply to every buyback?
Section 69(2) applies where the company purchases its own shares or other specified securities in accordance with section 68 of the Companies Act, 2013 and the shareholder is a promoter.
Can I deduct expenses and STT from a buyback gain?
Expenditure incurred wholly and exclusively in connection with the transfer is deductible under section 72(1)(a), along with cost of acquisition. Securities transaction tax paid is not allowed as a deduction (section 72(3)(b)).