- What changed, clause by clause
- Ordinary shareholders
- Worked example 1: a retail investor, before and after
- Promoters: the additional tax
- Worked example 2: an individual promoter of an unlisted company
- Points to watch
- Where this fits
From 1 April 2026, when a company buys back your shares, the gain is taxed as a capital gain. It is no longer treated as a dividend. The Finance Act, 2026 deleted buyback payments from the definition of “dividend” in the Income-tax Act, 2025. Under section 69, the difference between your cost and the buyback price is a capital gain of the year of the buyback. It is short-term or long-term depending on how long you held the shares. Promoters pay an extra layer of tax on top:
- 2% on short-term and 9.5% on long-term gains where the promoter is a domestic company;
- 10% and 17.5% for other promoters, including individuals;
- a 12% surcharge on that additional tax.
What changed, clause by clause
| Provision | Income-tax Act, 2025 as enacted (August 2025) | After the Finance Act, 2026 (from 1 April 2026) |
|---|---|---|
| Section 2(40)(f) | Payment by a company on purchase of its own shares under section 68 of the Companies Act, 2013 was a “dividend” | Omitted by section 35(b) of the Finance Act |
| Section 69(1) | Difference between cost and consideration is capital gains in the year of buyback | Unchanged |
| Section 69(2) | Where the payment was a dividend, the consideration was deemed nil, so the cost became a capital loss | Substituted: additional income tax for promoters |
| Section 69(3) | Definition of “specified securities” | Substituted: definitions of “promoter” and “specified securities” |
Section 1(2)(a) of the Finance Act, 2026 brings these amendments into force on 1 April 2026, so they apply from tax year 2026-27.
The deemed-dividend treatment that the 2025 Act originally carried forward was the rule under the Income-tax Act, 1961 (section 2(22)(f)) for buybacks from 1 October 2024 until 31 March 2026.
For a shareholder who is not a promoter:
- Gain is buyback price minus cost of acquisition (section 69(1), subject to section 72).
- Holding period. For listed shares, more than 12 months makes the gain long-term (section 2(101)). For unlisted shares the line is 24 months.
- Rate. If the conditions of section 196 (short-term) or section 198 (long-term) are met, including securities transaction tax, the rates are 20% short-term and 12.5% on long-term gains above ₹1,25,000. Otherwise long-term gains are taxed at 12.5% under section 197, and short-term gains at slab rates. The company’s letter of offer and your contract note show how the buyback was executed.
- A loss arises if the buyback price is below your cost. It is a capital loss, set off under section 108.
Worked example 1: a retail investor, before and after
Priya holds 100 listed shares bought 20 months earlier at ₹800 each. The company buys them back at ₹1,200. She pays tax at 30% and has no other long-term equity gains this year. Assume the buyback meets the section 198 conditions.
| Deemed-dividend rule (FY 2025-26) | Capital gains rule (tax year 2026-27) | |
|---|---|---|
| Taxed as | Dividend of ₹1,20,000 at slab rate | Long-term capital gain of ₹40,000 |
| Tax | ₹36,000 plus ₹1,440 cess | Nil: within the ₹1,25,000 threshold |
| Cost of ₹80,000 | A capital loss, usable only against capital gains | Deducted from the buyback price |
Illustrative figures.
Promoters: the additional tax
New section 69(2) applies when the shareholder is a promoter. The tax on the buyback gain is the normal capital gains tax plus an additional income tax:
| Capital gain | Promoter is a domestic company | Promoter is anyone else (including an individual) |
|---|---|---|
| Short-term, under section 196 | 2% | 10% |
| Long-term, under section 197 or 198 | 9.5% | 17.5% |
Section 3(6) of the Finance Act, 2026 adds a surcharge of 12% to tax charged under section 69, and 4% cess applies.
Before surcharge and cess, the combined rate for an individual promoter comes to 30% on short-term gains under section 196 (20% + 10%). On long-term gains under section 197 it is also 30% (12.5% + 17.5%). For a domestic company promoter the combined rates are 22%.
Who is a promoter. Section 69(3) defines the term:
- Listed company: 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 anyone holding, directly or indirectly, more than 10% of the shareholding.
In an unlisted company, a shareholder with more than 10% is caught even if not named as a promoter.
Worked example 2: an individual promoter of an unlisted company
Suresh holds 15% of a private company for six years. The company buys back part of his holding and he makes a long-term capital gain of ₹10,00,000. His total income, including this gain, is below ₹50 lakh, so no ordinary surcharge applies. His other income also exceeds the basic exemption limit.
| Component | Computation | Amount |
|---|---|---|
| Capital gains tax, section 197 | 12.5% × ₹10,00,000 | ₹1,25,000 |
| Additional tax, section 69(2) | 17.5% × ₹10,00,000 | ₹1,75,000 |
| Surcharge on additional tax, section 3(6) | 12% × ₹1,75,000 | ₹21,000 |
| Cess at 4% | 4% × ₹3,21,000 | ₹12,840 |
| Total | ₹3,33,840 |
Illustrative. We have applied the section 3(6) surcharge to the additional tax, which is the tax charged at the rates in section 69. For listed shares taxed under section 198, check how the ₹1,25,000 threshold interacts with the additional tax before relying on a computation.
Points to watch
- Year of the buyback decides the rule. A buyback completed in FY 2025-26 follows the Income-tax Act, 1961 and the deemed-dividend treatment. A buyback on or after 1 April 2026 follows the new rules.
- Old capital losses. A capital loss created under the deemed-dividend rule can be carried forward and set off against capital gains in later years, within eight years, provided the return for the loss year was filed on time (section 536(2)(n) for losses from years under the 1961 Act). A capital gain from a 2026-27 buyback is a natural place to use it.
- Dividend deductions are gone anyway. From tax year 2026-27, section 93(2), as substituted, allows no deduction against dividend income. Buyback gains, being capital gains, are computed under section 72 instead.
- Promoter status is tested under section 69(3), not by how you describe yourself.
Where this fits
- Compute the gain: capital gains calculator
- Use a buyback loss against other gains: capital loss set-off planner
- Equity rates and thresholds: tax on equity shares and equity funds, 2026-27
- High-income surcharge: surcharge and marginal relief for 2026-27
- Using old losses: capital loss set-off and carry forward
Sources. Finance Act, 2026, sections 1(2)(a), 3(6), 35, 42 and 44, Gazette of India, 30 March 2026. Income-tax Act, 2025, sections 2(40), 2(101), 69, 72, 93, 108, 196 to 198 and 536, Gazette of India, 21 August 2025.