If you have ever tendered shares in a buyback, the arithmetic you remember no longer applies.
Since 1 October 2024 a buyback is not a capital gains event at all. The entire amount is dividend income.
# What changed
| Before 1 Oct 2024 | From 1 Oct 2024 | |
|---|---|---|
| Company | Paid 20% buyback distribution tax under s.115QA | Pays nothing — 115QA no longer applies |
| Shareholder | Receipt exempt | Taxed as dividend under s.2(22)(f) |
| Taxed on | — | The full amount received |
| Head of income | — | Income from other sources |
| Rate | — | Your slab rate |
| Cost of acquisition | Reduced the gain | Becomes a capital loss |
| TDS | — | Section 194, 10% (residents) |
# The part that surprises everyone
That ₹8 lakh does not vanish, but it goes somewhere else entirely: it becomes a capital loss, available to be carried forward for eight subsequent financial years.
And here is the difficulty:
# What that does to the arithmetic
Take a shareholder in the 30% bracket, cost ₹8 lakh, buyback proceeds ₹10 lakh:
| Amount | |
|---|---|
| Dividend income taxed | ₹10,00,000 |
| Tax at 30% plus cess | roughly ₹3,12,000 |
| TDS deducted under s.194 at 10% | ₹1,00,000 |
| Balance payable | roughly ₹2,12,000 |
| Capital loss created | ₹8,00,000, usable over 8 years against capital gains only |
On an economic gain of ₹2 lakh, the immediate tax is over ₹3 lakh. The relief exists, but it sits in the future and is conditional on having capital gains.
# TDS
Section 194 applies at 10% for resident shareholders. For non-residents, Section 195 or the applicable treaty rate.
The deduction is on the gross buyback amount, which follows from the dividend classification — there is no netting of cost at the TDS stage either.
# When the loss actually helps
The eight-year carry-forward is genuinely valuable — for the right shareholder.
It works well if you:
- Regularly realise capital gains from equity or property
- Have other holdings you were planning to sell anyway
- Can time a disposal to absorb the loss
It works poorly if you:
- Are a buy-and-hold investor with few realisations
- Have no capital gains in prospect over the next several years
- Are at a high slab rate, so the immediate cost is heaviest
# Before you tender
- Compute slab-rate tax on the gross amount, not on the gain
- Ask when you would realistically use the capital loss — if never, treat it as worth nothing
- Compare against simply selling in the market — capital gains rates with the cost fully deductible
- Account for TDS at only 10% — the balance is yours to pay, possibly as advance tax
- For non-residents, check the treaty position before assuming a rate
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Also useful
Frequently asked questions
Does the company still pay buyback distribution tax?
No. Section 115QA no longer applies to any buyback taking place on or after 1 October 2024. The company's 20% distribution tax has gone entirely, and the tax burden has moved to the shareholder.
How is the shareholder taxed now?
As dividend, not as capital gains. Clause (f) was added to Section 2(22), which classifies buyback proceeds as dividend income assessed under income from other sources. It is therefore taxed at your applicable slab rate rather than at a capital gains rate.
Is the tax on the gain or on the whole amount?
On the whole amount received. This is the point that surprises people most. Your cost of acquisition does not reduce the dividend income at all — the entire buyback consideration is taxable as dividend.
So what happens to my purchase cost?
It becomes a capital loss, which you can carry forward for eight subsequent financial years. But a capital loss can only be set off against capital gains, not against the dividend income arising from the same buyback. So the relief is real but deferred, and only useful if you have capital gains to absorb it.
Is TDS deducted?
Yes. Section 194 applies, at 10% for resident shareholders. For non-residents the rate follows Section 195 or the applicable treaty. The TDS is on the gross buyback amount, consistent with it being treated as dividend.
Is this better or worse than the earlier position?
For most shareholders it is worse, and materially so for those at higher slabs. Previously the company paid the tax and the receipt was exempt in the shareholder's hands. Now the full amount is taxed at your slab rate while the cost relief is pushed into a future capital loss that may take years to use.
Does it make a difference whether the shares are listed or unlisted?
The dividend treatment applies to buybacks by domestic companies generally. What differs across situations is the practical impact — the shareholder's slab rate, whether they have capital gains available to absorb the loss, and the treaty position for non-residents. The classification itself is the same.
Should I tender shares in a buyback now?
That is now a real calculation rather than an automatic yes. Work out the tax at your slab rate on the full amount, then assess how quickly you can realistically use the resulting capital loss. For someone at 30% with no capital gains in prospect, tendering can be substantially worse than selling in the market. Compare the two routes before deciding.