Share Buyback Tax in India: A Guide for Companies & Shareholders (2026)

Short answer: Indian companies, both listed and unlisted, must pay a buyback tax under Section 115QA of the Income-tax Act, 1961. The tax is levied at an effective rate of 23.296% on the difference between the buyback price and the issue price of the shares. For the shareholder receiving the money, this income is completely tax-exempt under Section 10(34A), preventing double taxation. This regime has been in place since July 2019 for listed companies.

What is the tax on share buyback for a company?

The company itself is liable to pay the buyback tax, not the shareholder. This tax, governed by Section 115QA, is levied on the company's "distributed income". This is the excess of the consideration paid by the company on buyback over the price at which it originally issued those shares. The tax rate is 20% plus a 12% surcharge and a 4% Health and Education Cess, resulting in an effective tax rate of 23.296%.

Is buyback income taxable for shareholders?

No, the income received by a shareholder from a share buyback is exempt from tax. Section 10(34A) of the Income-tax Act explicitly exempts any income received by a shareholder on account of a buyback of shares, as the company has already borne the tax liability on the transaction at the corporate level. This applies regardless of whether the shareholder has made a long-term or short-term capital gain on the shares.

How is the buyback tax calculated?

The tax is calculated on the distributed income, which is the profit element of the buyback from the company's perspective. The formula is straightforward: (Buyback Price per share – Issue Price per share) × Number of shares bought back. The term "issue price" is critical and is determined as per Rule 40BB of the Income-tax Rules. For shares issued on subscription, it is the amount received by the company. For bonus shares or other specific cases, the rules provide different methods for determining this price.

Does the buyback tax apply to all companies?

Yes, the buyback tax under Section 115QA applies to all domestic companies in India. This includes both private limited companies (unlisted) and public companies whose shares are traded on a stock exchange (listed). While the tax initially applied only to unlisted companies, its scope was extended by the Finance Act, 2019 to cover listed companies as well, effective from 5 July 2019, creating a uniform tax regime for all buybacks.

What is the difference between buyback tax and capital gains tax?

The core difference lies in who pays the tax. Before the current regime was applied to listed companies in 2019, shareholders would pay capital gains tax on the profit from selling their shares back to the company. Now, the tax liability has shifted from the shareholder to the company. The company pays a flat buyback tax, and the shareholder receives the proceeds tax-free.

Feature	Tax on Buyback (Post July 2019)	Capital Gains Tax (Pre July 2019 for Listed Co.)
Taxpayer	The Company (Listed or Unlisted)	The Shareholder
Taxable Event	Distribution of income by the company on buyback	Transfer of capital asset (shares) by shareholder
Taxable Amount	Buyback Price - Issue Price	Buyback Price - Shareholder's Cost of Acquisition
Tax Section	Section 115QA	Section 45, 111A, 112, 112A
Tax Rate	Effective Rate of 23.296% on company	Depended on holding period (STCG/LTCG)
Shareholder Tax	Exempt under Section 10(34A)	Taxable in the hands of the shareholder

When is the buyback tax payable?

A company must pay the buyback tax within 14 days from the date of payment of any consideration to the shareholders for the buyback. Failure to pay the tax within this timeframe attracts simple interest at the rate of 1% per month or part of a month on the unpaid tax amount, as per Section 115QB. The payment must be made via Challan ITNS-280.

Worked example

Let's consider "Bengaluru Innovations Pvt. Ltd.", a tech startup, which decides to provide an exit to its early investors through a share buyback.

• Company: Bengaluru Innovations Pvt. Ltd.
• Shares to be bought back: 20,000 equity shares
• Buyback price offered: ₹2,000 per share
• Original issue price: ₹50 per share (the price at which the company first issued these shares)

Here is the step-by-step tax calculation for the company:

1. Total Buyback Consideration: 20,000 shares × ₹2,000/share = ₹4,00,00,000
2. Total Issue Price of Shares: 20,000 shares × ₹50/share = ₹10,00,000
3. Distributed Income (Taxable Base): ₹4,00,00,000 - ₹10,00,000 = ₹3,90,00,000
4. Base Tax @ 20%: 20% of ₹3,90,00,000 = ₹78,00,000
5. Surcharge @ 12% on Tax: 12% of ₹78,00,000 = ₹9,36,000
6. Tax + Surcharge: ₹78,00,000 + ₹9,36,000 = ₹87,36,000
7. Health & Education Cess @ 4%: 4% of ₹87,36,000 = ₹3,49,440
8. Total Buyback Tax Payable by Company: ₹78,00,000 + ₹9,36,000 + ₹3,49,440 = ₹90,85,440

For a shareholder who sells 1,000 shares in this buyback, they receive 1,000 x ₹2,000 = ₹20,00,000. This amount is entirely exempt from income tax in their hands.

Common mistakes

1. Shareholders declaring income: The most frequent error is shareholders mistakenly reporting the buyback proceeds as capital gains in their Income Tax Return (ITR), leading to unnecessary tax payment. This income is exempt under Section 10(34A).
2. Incorrect calculation of 'Issue Price': Companies often get confused about calculating the issue price, especially when shares were issued at different times, via bonus, or as part of an amalgamation. Rule 40BB provides specific methods, and errors can lead to incorrect tax computation.
3. Delaying tax payment: Companies must deposit the tax within 14 days of paying the shareholders. Missing this deadline leads to mandatory interest under Section 115QB, which is not a deductible expense.
4. No credit for buyback tax: The company cannot claim a credit for the tax paid under Section 115QA against its regular income tax liability. It is a final tax on the distribution.

How SP & SC helps

Navigating a share buyback involves strict compliance under both the Companies Act, 2013 and the Income-tax Act, 1961. SP & SC Legal and Taxation Services provides end-to-end guidance to ensure a smooth and compliant buyback process. We assist with structuring the buyback, determining the issue price as per Rule 40BB, accurately calculating the tax liability, and ensuring timely payment and filings with the tax authorities. Our goal is to ensure you meet all legal obligations while achieving your corporate objectives. For detailed assistance, check our Tax Consultation services.

Frequently asked questions

H3: Is there any change in buyback tax from October 2024?

No, there have been no material changes to the core mechanism of share buyback taxation under Section 115QA since it was made applicable to listed companies in July 2019. The system of a corporate-level tax on distributed income with an exemption for shareholders remains the same. The date 'October 2024' does not correspond to any specific amendment in this area.

H3: Can a company claim the buyback tax as an expense?

No. The tax paid under Section 115QA is a final tax on the company's distributed profits. It cannot be claimed as a deductible business expenditure to reduce its taxable income, nor can it be claimed as a credit against the company's regular corporate tax liability.

H3: What if the shareholder acquired shares from another person, not the company?

The company's tax liability is unaffected. The tax is calculated based on the difference between the buyback price and the original "issue price" at which the company first allotted the shares. The price at which the current shareholder acquired the shares from a previous owner is irrelevant for the Section 115QA calculation. The shareholder's income remains exempt regardless.

H3: Does this tax apply to buyback of ESOPs?

Yes. When a company buys back shares that were originally issued to employees under an Employee Stock Option Plan (ESOP), the provisions of Section 115QA apply. The "issue price" for calculating the distributed income would be the fair market value (FMV) of the shares on the date the employee exercised the option, as this is the value on which the employee paid perquisite tax. You can read more in our ESOP guide.

Get a fixed-fee quote

To ensure your share buyback is structured correctly and is fully compliant with tax and corporate laws, share your company's documents with us. We will provide a written fixed-fee quote after our initial review. Contact SP & SC via our website, or WhatsApp us at +91 90356 74566. Our team of Chartered Accountants and Advocates handles the entire process end-to-end, from planning to final compliance.