Buyback tax in India after the 2024 change: how it works now

The old system and why it changed

Until 30 September 2024, when a company bought back its own shares, the Income Tax Act required the company itself to pay a buyback tax on the distributed income. The rate was a flat percentage applied to the difference between the buyback price and the issue price of the shares being bought back, computed at the company level. This meant the tax was the same regardless of who the selling shareholder was or what tax bracket they fell in: a promoter, a foreign institutional investor, and a retail investor all had the same effective buyback tax borne on their behalf by the company.

The Finance (No. 2) Act 2024, which also revised the capital-gains rates, abolished this company-level buyback tax and replaced it with a shareholder-level charge. The rationale was alignment with the treatment of dividends, which are already taxed in the hands of the shareholder since 2020. Buybacks are economically similar to dividends (both return cash to shareholders), so the Budget decision was to tax them the same way.

How the new system works

From 1 October 2024, when a shareholder tenders shares in a buyback and receives the buyback price, those proceeds are treated as deemed dividend income in their hands. This means the full buyback proceeds (not just the gain) are added to the shareholder's income for the year and taxed at their applicable income-tax slab rate. A shareholder in the highest tax bracket pays a much higher effective rate on the buyback proceeds than a shareholder in a lower bracket. This is a significant departure from the flat, company-level tax of the old system.

To prevent double taxation, the Income Tax Act provides a mechanism: the original cost of the shares tendered in the buyback is allowed as a capital loss in the hands of the shareholder. So if you bought shares at 100 rupees and tendered them in a buyback at 160 rupees, the 160 rupees is deemed dividend income, but you can also claim a capital loss of 100 rupees (your cost of acquisition). This capital loss can be set off against other capital gains you have in the same financial year, effectively reducing the tax bite on the buyback by the tax value of the loss offset. Any unabsorbed capital loss can be carried forward under the normal rules.

When a buyback is better or worse than a dividend after tax

The new system makes the comparison between a buyback and a dividend more nuanced. Under the old regime, a company considering whether to return cash via a buyback or a dividend had to compare the company-level buyback tax against the dividend tax in the shareholder's hands. Under the new regime, both are taxed in the shareholder's hands, but there is a difference: the capital loss offset available in a buyback has no equivalent in a dividend. A shareholder with significant capital gains in a year gains extra value from the buyback's capital-loss offset that a dividend payment cannot provide.

For shareholders in high tax brackets, the new regime makes buybacks more expensive on the headline income than a dividend, since both are slab-taxed but the capital loss offset only partially compensates. For institutional shareholders like mutual funds, the tax treatment depends on their specific fund structure and whether the deemed dividend is taxed at fund level or passed through. Checking the specific post-tax arithmetic for your personal tax situation before participating in a buyback or favouring one over a dividend is now a necessary step that did not apply in the same way under the old company-level tax system.

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