AS | Ankit Sarawagi|Founder, CFOmatrix·September 2026·9 min read | M&A & Exits |
For years a share buyback was the tidy, tax-friendly way to return cash to shareholders: the company paid the tax, the shareholder took the money home free. From 1 October 2024 that logic is inverted, and a buyback can now be one of the most expensive ways to get money out.
The 2024 change moves the entire tax burden onto the shareholder and taxes the buyback like a dividend, not a capital gain. That single shift changes the arithmetic of founder liquidity, early-investor exits and any plan to shrink an over-capitalised cap table. This guide walks through what changed, a worked example with real numbers, the capital-loss trap that catches most people, the Companies Act limits, and why a secondary sale is now usually the better route.
- Old regime (to 30 Sep 2024)
- Company paid buyback tax of about 23%; shareholder received the proceeds tax-free.
- New regime (from 1 Oct 2024)
- Full consideration is a deemed dividend taxed in the shareholder’s hands at slab rate.
- Cost deduction
- Not allowed against the dividend; the cost becomes a separate capital loss.
- The trap
- Sale consideration is deemed nil, so you book a capital loss equal to cost, usable only against other capital gains.
- Better alternative
- A secondary sale of unlisted shares held over 24 months: LTCG at 12.5% with cost deductible.
1 What changed on 1 October 2024
Until 30 September 2024, a buyback of shares by a domestic company attracted a buyback distribution tax at the company level of roughly 23% (including surcharge and cess), and the amount the shareholder received was exempt in their hands. The tax was real, but it was the company’s problem, and shareholders liked the clean, tax-free receipt.
From 1 October 2024 the treatment flips completely. The entire buyback consideration is now treated as a deemed dividend under the buyback deeming clause of the Income-tax Act (Section 2(22)(f)), and is taxed in the shareholder’s hands as Income from Other Sources at their applicable slab rate. The company-level buyback distribution tax has been abolished, so the company no longer pays that roughly 23%.
2 Old regime versus new regime
The cleanest way to see the change is side by side. Same buyback, entirely different tax path.
| Feature | Until 30 Sep 2024 | From 1 Oct 2024 |
|---|---|---|
| Who pays the tax | The company | The shareholder |
| Rate | About 23% at company level | Slab rate on the full amount |
| Character of income | Exempt receipt for shareholder | Deemed dividend (Income from Other Sources) |
| Cost of shares deductible? | Not relevant (proceeds exempt) | No, not against the dividend |
| Capital gains treatment | None (exempt) | Consideration deemed nil, so a capital loss equal to cost |
3 A worked example: what a buyback now costs
Numbers make the shift obvious. Take an early angel investor in Brewly who wants to exit through a company buyback.
Brewly buys back 10,000 Equity Shares from an early angel. The angel paid ₹100 a share years ago, so cost is ₹10,00,000. Brewly buys them back at ₹500 a share, so the buyback consideration is ₹50,00,000. The angel is a resident individual in the top slab.
Under the two regimes the same ₹50,00,000 buyback plays out like this:
| Item | Old regime (to Sep 2024) | New regime (from Oct 2024) |
|---|---|---|
| Buyback amount received | ₹50,00,000 | ₹50,00,000 |
| Taxed as | Exempt in angel’s hands | Deemed dividend, full ₹50,00,000 |
| Tax in shareholder’s hands (approx 35.88% top slab) | Nil | About ₹17,94,000 |
| Company buyback tax (approx 23%) | About ₹9,20,000 | Nil |
| Cost of ₹10,00,000 | Not usable | Booked as a capital loss (see section 4) |
| Net cash to shareholder | ₹50,00,000 | About ₹32,06,000 |
The shareholder who would once have banked the full ₹50,00,000 now keeps roughly ₹32,06,000. The company saves its old buyback tax, but the shareholder is far worse off, and it is usually the shareholder whose return the deal is meant to protect.
4 The capital-loss trap
Here is the part that surprises even seasoned founders. Because the whole receipt is taxed as a dividend, the law then treats the sale consideration for capital gains as nil. With cost of ₹10,00,000 and nil consideration, the shareholder books a capital loss of ₹10,00,000.
That loss is not worthless, but it is boxed in:
- It can be set off against other eligible capital gains in the same year.
- Any unused amount can be carried forward for up to 8 assessment years.
- It cannot be set off against the deemed dividend from the same buyback.
So the cost you actually paid gives you no relief against the tax on the buyback itself. You only recover its value later, and only if you happen to have other capital gains to absorb it. For a shareholder with no other capital gains on the horizon, that carried-forward loss can simply expire unused.
5 Companies Act limits on a buyback
The tax is only half the picture. A buyback must also clear Section 68 of the Companies Act 2013 before it can happen at all.
6 Buyback versus secondary sale: the verdict
Put the two exit routes next to each other for the same angel wanting to cash out of Brewly, and the new maths points one way.
| Route | How it is taxed | Cost deductible? | Effective load |
|---|---|---|---|
| Buyback (post Oct 2024) | Deemed dividend at slab rate on the full amount | No (only a boxed-in capital loss) | Up to about 35.88% on the whole receipt |
| Secondary sale (unlisted, held over 24 months) | Long-term capital gains at 12.5% | Yes, cost is deducted from consideration | 12.5% on the gain only |
On the same ₹50,00,000, a secondary sale taxes only the ₹40,00,000 gain at 12.5%, a tax of ₹5,00,000, against roughly ₹17,94,000 as a buyback. That is why, for returning cash to a founder or letting an early investor exit, a secondary sale is now usually the more tax-efficient structure. A buyback still has its place, for example to clean up very small holdings, absorb treasury shares, or where a shareholder has a low slab or offsetting capital gains, but it is no longer the default.
7 Your buyback decision checklist
- Confirm the exit is happening on or after 1 October 2024, so the new shareholder-level regime applies.
- Estimate the tax as slab rate on the full consideration, not on the gain.
- Check whether the shareholder actually has other capital gains to absorb the deemed capital loss, or it may expire unused.
- Compare the after-tax cash against a secondary sale taxed at 12.5% LTCG.
- Test the Section 68 limits: 25% of capital and free reserves, 25% annual equity cap, and 2:1 debt-equity after buyback.
- Confirm the funding source: free reserves, securities premium, or fresh-issue proceeds.
- If a non-resident shareholder is involved, factor DTAA relief on the dividend and any FEMA pricing and reporting.
- Document the board or shareholder resolution and complete the ROC filings before paying.
Weighing a buyback against a secondary or an exit?
We model the after-tax cash for founders and investors across buyback, secondary sale and full exit, and structure the route that returns the most cash cleanly. Talk to us before you sign the term sheet.
Talk to CFOmatrix8 FAQs
How is a share buyback taxed in India after 1 October 2024?
Does the shareholder get to deduct the cost of the shares on a buyback?
Is a buyback still tax-free for shareholders?
Is a secondary sale more tax-efficient than a buyback now?
What are the Companies Act limits on a buyback?
Related guides
Secondary sale of startup shares in India →
Share transfer in a Pvt Ltd company (SH-4) →
Startup exits and M&A in India →
Plan your exit with CFOmatrix →
AS | Founder, CFOmatrix | Finance Strategy & Compliance CFOmatrix helps Indian startups build finance, tax and compliance functions that stand up to investor due diligence, from process and controls to the filings and the numbers behind them. |
Disclaimer: This article is general information as of September 2026 and is not tax or legal advice. Buyback, dividend and capital gains rules under the Income-tax Act and Companies Act can change and depend on your specific facts. Confirm your position with a qualified professional before acting.