Capital gains on buy-back of shares

Introduction

When a company buys back the shares or other specified securities, it constitutes a transfer in the hands of the shareholder and accordingly, income arising from such transfer is chargeable to tax under the head capital gain as per Section 69.

1. History of tax on buyback of shares

The history of the taxation of the buyback of shares is as follows:

(a) Until 31

(c) From 1

(d) From 5

(f) From 1

Section 69 of the ITA 2025 is a charging provision that provides the taxable event and the mechanism for computing the capital gains due to consideration received by a shareholder from any company (domestic or foreign company) for the buyback of shares and specified securities (employees' stock options). The calculation of capital gains under this provision shall be done as per Section 72, which provides as follows:

3. Factors for calculation of capital gains

Any profits or gains arising from transfer of capital assets, under a scheme of buy-back, shall be chargeable to tax under the head capital gains in the tax year in which such transfer took place. For computation of capital gains in such case, the following factors are considered:

(a) Period of holding;

(b) Full value of consideration;

(c) Cost of acquisition;

(d) Cost of improvement;

(e) Expenditure incurred in connection with transfer;

(f) Adjustment for the capital gains taxed under Section 67(10);

(g) Exemptions allowed under Section 82 to 88.

3.1. Computation of period of holding

See also: Capital gains on transfer of securities in Demat form

The period of holding of shares or securities shall be counted from the date of purchase or acquisition till the date of buy-back by the company. If the securities are held in Demat Form, the cost of acquisition and period of holding shall be determined as per the First-In-First-Out (FIFO) Method. It implies that the securities that first entered into the Demat account are deemed to be the first to be sold out. In other words, the securities acquired last will be taken to remain with the assessee, while securities acquired first will be treated as sold. For determining the date of purchase and cost of acquisition, the contract note or broker's note shall be considered, provided such transactions are followed by delivery of shares and transfer deeds.

3.2. Computation of full value of consideration

The full value of consideration is the amount of consideration received or receivable by the holder of shares or other specified securities in lieu of buy-back of such securities.

3.3. Computation of cost of acquisition

The cost of acquisition of the securities transferred under the buy-back scheme shall be computed as per general provisions. Further, if a non-resident acquires shares or debentures of an Indian company in foreign currency, capital gain in such cases is computed in foreign currency, and thereafter, it is converted into Indian currency in accordance with Rule 52.

3.4. Computation of cost of improvement

The cost of improvement of the securities transferred under buy-back scheme shall be computed as per general provisions.

3.5. Adjustment for the capital gain taxable under Section 67(10)

Where the amount is chargeable to tax as income of partnership firm under Section 67(10), the firm shall attribute such amount to the capital asset remaining with it, including capital assets forming part of block of asset. Such attribution is allowed, at the time of computation of capital gains from the transfer of such capital asset remaining with the partnership firm, by way of deduction under Section 72(5). The deduction under Section 72(5) is allowed if the following conditions are satisfied:

(a) There should be a reconstitution of the partnership firm;

(b) Capital asset or money or both should be given to the partner on such reconstitution;

(c) Capital gain is computed and taxed in the hands of the firm under Section 67(10); and

(d) The book value (or historical value or WDV) of at least one of the capital assets remaining with the firm after such reconstitution should be less than its fair market value. It may also include the self-generated asset.

The amount chargeable to tax under Section 67(10) shall relate to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill of firm if the revaluation is based on a valuation report obtained from a registered valuer defined under Rule 56.

3.6. Computation of exemptions

Exemption under Section 86 can be claimed from the capital gains arising from transfer of securities under buy-back scheme subject to fulfilment of certain conditions. Further, a non-resident Indian can claim exemption under Section 215.

3.7. Year in which taxable

Liability to pay tax on the capital gain shall arise in the tax year in which shares or securities are purchased by the company.

4. Tax rates on capital gains on buy-back of shares

4.1. Tax rates on non-promoters

If the shareholder or security holder tendering shares or securities in the buy-back scheme is not a promoter, the tax rates on the long-term or short-term capital gains will be as follows:

4.2. Tax rates on promoters

When promoters tender their shares in the buyback scheme, they will be liable to pay the following additional tax:

The final tax liability of promoters on the buyback of shares or securities will be as follows:

4.3. Surcharge on the additional tax by promoters will be 12%

The additional tax payable on buyback of shares under Section 69 by promoter is increased by surcharge at the rate of 12%, irrespective of the level of total income of the promoter.

Illustration

A resident individual transfers the shares of multiple companies under the buyback scheme. The facts of each company are mentioned in the table below.

The taxability in these buyback transactions will be as follows:

Note 1: As the individual is the beneficial owner of the shares held by the spouse, the holding should be aggregated for computing the 10% threshold.

Note 2: The long-term capital gains from the listed shares under Section 198 will be taxable in excess of Rs. 1,25,000. For ease of calculation, this reduction has not been made while computing the tax liability in this scenario. Further, the surcharge of 12% and the health & education cess of 4% has not been considered for computing the tax and additional tax on the capital gains.

5. Meaning of promoter

Section 69(3) of the ITA 2025 defines the term "promoter" for the purpose of the tax payable on the buyback. This provision defines the promoter of a listed and unlisted company separately.

5.1. Promoters of a listed company

"Promoter"

(a) Who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred to in section 92 of the Companies Act, 2013; or

(b) Who has control over the affairs of the issuer, directly or indirectly, whether as a shareholder, director or otherwise; or

(c) In accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act. However, a person acting solely in a professional capacity will not be considered a promoter under this provision.

(d) Who is a member of the promoter group.

Regulation 2(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 provides that the "control" includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

5.1-1. Meaning of promoter group

"Promoter Group" includes the following:

(a) The promoter;

(b) An immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse);

(c) In case the promoter is a body corporate:

• A subsidiary or holding company of such body corporate;

• Any body corporate in which the promoter holds 20% or more of the equity share capital;

• Any body corporate that holds 20% or more of the promoter's equity share capital.

(d) In case the promoter is an individual:

• Any body corporate in which 20% or more of the equity share capital is held by the promoter or an immediate relative of the promoter, or a firm or HUF in which the promoter or any one or more of their relative is a member;

• Any body corporate in which a body corporate as provided above holds 20% or more of the equity share capital; and

• Any HUF or firm in which the aggregate share of the promoter and their relatives is equal to or more than 20% of the total capital;

(e) All persons whose shareholding is aggregated under the heading "shareholding of the promoter group"

5.1-2. Who will not be a promoter?

"Promoter" shall not include the following person merely by virtue of the fact that 20% or more of the equity share capital of the issuer is held by them, unless such person satisfies other requirements prescribed under these regulations;

(a) Financial Institution

(b) Scheduled Commercial Bank

(c) Foreign Portfolio Investor (other than Individuals)

(d) Corporate bodies and family offices

(e) Mutual Fund

(f) Venture Capital Fund

(g) Alternative Investment Fund

(h) Foreign Venture Capital Investor

(i) Insurance Company registered with the IRDAI

(j) Any other category as specified by the Board from time to time

However, the above persons shall be treated as a promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.

5.2. Promoters of any other company

Clause (b) of Section 69(3) provides that a 'promoter', in any other case, shall mean the following:

(a) A "promoter" as defined in Section 2(69) of the Companies Act, 2013; or

(b) A person who holds, directly or indirectly, more than 10% of the shareholding in the company.

Thus, in an unlisted and a foreign company, the promoter shall include a person:

(a) Who has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92 of the Companies Act, 2013; or

(b) Who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; or

(c) In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. However, a person acting solely in a professional capacity will not be considered a promoter under this provision.

(d) Who holds, directly or indirectly, more than 10% of the shareholding in the company.

Section 2(27) of the Companies Act, 2013 provides that the term "control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

5.2-1. How to compute the 10% shareholding in the company?

Clause (b) of Section 69(3) provides that a 'promoter', in case of an unlisted or foreign company, shall include a person who holds, directly or indirectly, more than 10% of the shareholding in the company.

The phrase "directly or indirectly" in the provision requires looking beyond mere legal or registered ownership to encompass the true beneficial ownership and control. For instance, if a spouse holds shares, but the economic benefits, risks, and control ultimately rest with the individual, then the individual is considered the beneficial owner, and the spouse's holding should be aggregated. However, if the spouse is the registered owner of the shares and at the same time the beneficial owner of the same, this holding should not be aggregated with the individual's holding to compute the 10% threshold.

The following are the relevant principles laid down by the court, which one can consider while determining if the shareholding of the relative should be aggregated:

(a) The term 'indirectly' requires looking beyond the immediate transaction to the ultimate source and benefit

(b) Once it was established that the assessee was the real owner of the shares, and they had been purchased benami in the names of his wife and two sons, the ownership was presumed to remain with the assessee

(c) The "substance over form" principle, reinforced by the General Anti-Avoidance Rules (GAAR), empowers tax authorities to scrutinise transactions and holdings to ascertain their true economic reality. If a spouse's holding lacks commercial substance and is primarily intended to circumvent a shareholding limit, authorities can aggregate it with the individual's holding.

5.3. When should the promoter's status be computed?

The provision is silent on when the shareholder's status as a promoter should be calculated. Thus, it may be assumed that it should be computed on the date of the transfer of the shares.

6. Set off capital losses against capital gains arising on buyback of shares

A key issue requiring examination is whether other capital losses may be set off against capital gains computed under Section 69, and if so, whether such a set-off has any impact on the additional levy imposed under this provision.

Section 69 provides that gains arising from buybacks shall be chargeable to tax under the head "Capital Gains." Once income is placed under a specific head, the ordinary computation provisions apply unless the statute explicitly provides otherwise. In the case of Section 69, there is no express restriction relating to set-off or carry-forward of capital losses. Therefore, losses arising from other capital transactions may be adjusted against capital gains computed under Section 69. However, a distinct issue arises for promoter shareholders who are subject to levy of an additional tax.

The additional tax is a separate statutory levy which becomes payable once capital gains arise to a promoter from a buyback transaction. Although the promoter may adjust capital losses to arrive at the net capital gains from buyback transactions, the additional tax continues to apply. In other words, the set-off mechanism operates at the stage of computing capital gains, but the additional tax remains payable in accordance with the provisions of Section 69. Thus, even if there are no taxable capital gains due to the set-off of the losses, the additional tax will still be payable on the actual capital gains before the set-off. Further, where the long-term capital gains are taxable under Section 198, the benefit of Rs. 1.25 lakhs, up to which the tax will not be charged, will not be available while computing the additional tax payable under Section 69.

Illustration

Mr X is an individual shareholder holding 12% of the listed equity shares in ABC Ltd. and 15% of the unlisted equity shares in XYZ Pvt. Ltd. He has brought forward a long-term capital loss of Rs. 30 lakhs from earlier years. During the tax year 2026–27, he has the following capital transactions:

• Long-term capital gain on buyback of shares from ABC Ltd: Rs. 50 lakhs

• Long-term capital loss on sale of other listed equity shares: Rs. 10 lakhs

• Short-term capital gain on buyback of unlisted shares of XYZ Pvt. Ltd.: Rs. 15 lakhs

• Short-term capital loss on the sale of a residential land: Rs. 20 lakhs

The tax payable by Mr. X in the tax year 2026–27 on the capital gains will be computed as under:

7. Should the companies pay dividends instead of buying back shares?

When a company declares a dividend instead of buying back shares, the promoters' tax liability on the dividend income will be lower. In the example below, the tax liability of a resident promoter at different income levels has been computed for the dividend income and the capital gains arising from the buyback.

For example, Mr. A is a resident individual (taxable under the new tax regime) and promoter of an unlisted company. The company has accumulated profits during the tax year 2026-27 and plans to distribute them to shareholders either as a dividend or through a buyback. If the shareholder has no other source of income, his tax liability (including surcharge and cess) in both situations and the net benefits if distributed as a dividend are computed in the table below:

References

Section 69(3) refers to Regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018 for meaning of promoter. This regulation takes the meaning of this term from Regulation 2(1)(s) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, which in turn refers to Regulation 2(1)(oo) and Regulation 2(1)(pp) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

Under Schedule III of the Companies Act 2013, an entity must provide additional disclosures regarding promoter shareholdings. Specifically, for each class of shares, the company must disclose details of shares held by promoters at the end of the reporting period. The disclosure should include the name of the promoter, the number of shares held, the percentage of total shares of that class, and the percentage change in shareholding during the year. These details are required to be presented in a tabular format, separately for each class of shares.

CIT vs. Smt. Mohini Thapar [1972] 83 ITR 208 (SC)

CIT vs. Rai Bahadur Mohan Singh Oberoi [1973] 88 ITR 53 (SC)

The tax is computed after claiming reducing Rs. 1.25 lakhs from the long-term capital gains arising from the transfer of the listed equity shares.

Section 69(2)(b) does not provide for the levy of the additional tax on the STCG from buyback of unlisted share.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.