Share Buyback in India: How It Works and the New Tax Rules

What a Share Buyback Actually Means

A share buyback, also called a share repurchase, is a corporate action where a company spends its own cash to buy back shares it had earlier issued to the public. Those repurchased shares are then extinguished, so the total number of shares in circulation falls. Because the company's profits are now divided across fewer shares, metrics such as earnings per share and return on equity tend to rise even if the underlying business has not changed at all.

Think of it as the opposite of a fresh share issue. When a company raises money it sells new shares and dilutes existing owners. When it does a buyback it returns surplus cash and concentrates ownership among the remaining shareholders. Indian promoters frequently participate in buybacks too, which is one reason buybacks often signal that management believes the stock is cheap relative to its intrinsic value.

A buyback is not the same as a buyback being good for you. It only creates value if the shares are bought below their true worth and the cash genuinely had no better use inside the business. Spending crores to repurchase an expensive stock destroys value just as surely as overpaying for an acquisition.

The Big Change: Buyback Tax from 1 October 2024

This is the single most important thing to understand about Indian buybacks today, and most older articles still get it wrong. Until 30 September 2024, the company paid a buyback tax of 20% plus surcharge and cess under Section 115QA, and the money the shareholder received was completely tax free. That is the rule the previous version of this page described, and it no longer applies.

From 1 October 2024 onwards, the Finance (No. 2) Act 2024 flipped the system entirely. The company no longer pays any buyback tax. Instead, the full amount you receive in a buyback is treated as a deemed dividend in your hands under Section 2(22)(f) and is added to your income under the head Income from Other Sources. You then pay tax on it at your normal income tax slab rate, which for many investors is 30% plus surcharge and cess, far higher than the old regime ever cost an individual.

There is a second, less obvious part. The price you originally paid to buy those shares is not subtracted from the buyback proceeds. The entire receipt is taxed as dividend, and your original cost of acquisition is treated as a capital loss. This is a genuine capital loss you can set off against other capital gains in the same year or carry forward for up to 8 assessment years. So in a buyback today, the proceeds and the cost are taxed in two separate buckets, which is a structural change from the old all-tax-free treatment.

A Fully Worked Tax Example: Infosys Buyback

Let us walk through a realistic illustration using Infosys, a large liquid NSE stock often associated with buybacks. The figures below are illustrative and chosen for clarity, not a forecast. Assume you bought 200 Infosys shares at Rs 1,400 each a few years ago, a total cost of Rs 2,80,000. The company now announces a tender buyback at Rs 1,800 per share, and all 200 of your shares are accepted.

Buyback proceeds are 200 shares times Rs 1,800, which is Rs 3,60,000. Under the post October 2024 rules this entire Rs 3,60,000 is deemed dividend and taxed at your slab. If you are in the 30% bracket, ignoring surcharge and cess for simplicity, the dividend tax is roughly Rs 1,08,000. Separately, your cost of acquisition of Rs 2,80,000 becomes a capital loss. Because the shares were held over a year, it is a long-term capital loss of Rs 2,80,000 that you can carry forward for up to 8 years and set off only against capital gains.

The lesson is stark. The same Rs 3,60,000 cheque that would have been completely tax free before October 2024 can now cost a 30% slab investor around Rs 1,08,000 in tax in the year of the buyback. The carried forward capital loss softens this only if you actually have future capital gains to set it against. This is why high-slab investors must now think harder before tendering shares into a buyback.

Tender Offer vs Open Market Buyback

Indian buybacks happen through two main routes, and they work very differently for retail shareholders. In a tender offer, the company fixes a buyback price, usually at a premium to the market price, and reserves a portion of the buyback for small shareholders holding up to Rs 2 lakh of stock on the record date. You tender your shares and they are accepted in proportion to an acceptance ratio. The reserved 15% for small shareholders often means retail acceptance ratios are higher than for large holders.

In an open market buyback, the company simply buys its own shares from the exchange over a period of months, just like any other buyer. You do not tender anything, there is no fixed price, and you only benefit if you happen to sell into the market while the company is buying. SEBI has decided to phase out the open market route by 1 April 2025, pushing companies toward the more transparent tender mechanism, partly because open market buybacks were often inefficient and rarely used the full authorised amount.

• Tender offer: fixed price, reserved entitlement for small shareholders, you actively tender, proceeds taxed as deemed dividend.
• Open market: no fixed price, no tender, you must sell on the exchange, treated as a normal sale with capital gains, being phased out from April 2025.
• Record date matters: only shareholders on the record date are eligible for the tender entitlement, so buying just before record date to grab the entitlement is a known but risky tactic.
• Acceptance ratio is rarely 100%, so plan for some shares being returned to you unsold.

How a Tender Buyback Works Step by Step

The board first approves the buyback and announces the price, total amount, and the record date. SEBI rules cap the buyback at 25% of the company's paid-up capital and free reserves in a financial year, and the company must maintain a post-buyback debt to equity ratio of not more than 2 to 1. On the record date, the exchange identifies who is eligible and calculates each small shareholder's entitlement.

During the tender window, usually a few days, you log into your broker, go to the corporate actions or buyback section, and submit your shares. Your broker blocks those shares. After the window closes, the company decides the acceptance ratio. Accepted shares leave your demat account and the cash lands in your bank account, while unaccepted shares are unblocked and returned to you. The whole cycle from announcement to settlement typically runs a few weeks.

A practical detail many retail investors miss is the small shareholder reservation. SEBI reserves 15% of the buyback for shareholders whose holding value on the record date was up to Rs 2 lakh. Because large institutions cannot dip into this reserved pool, the acceptance ratio for genuinely small holders is frequently much higher than the headline buyback percentage, which is why small holdings sometimes see near full acceptance.

Why Companies Choose Buybacks

• Returning surplus cash: cash rich firms like established IT companies use buybacks to hand back money they cannot reinvest productively.
• Supporting the share price: shrinking supply can support the price, and the buyback floor price acts as a signal of perceived value.
• Improving per-share metrics: fewer shares lift EPS and return on equity, which can make valuation multiples look more attractive.
• Signalling confidence: a buyback at a premium tells the market that management thinks the stock is undervalued.
• Tax efficiency for the company historically: before October 2024 buybacks were used as a tax-smart alternative to dividends, though the new rules have largely erased that advantage for shareholders.

It is worth being sceptical too. Some managements use buybacks to prop up EPS and hit bonus targets rather than because the stock is cheap. A buyback funded by borrowing, rather than genuine surplus cash, raises leverage and risk. Always check whether the company is buying back from a position of strength or simply trying to flatter its numbers.

Buybacks vs Dividends After the 2024 Changes

For years buybacks were the tax-efficient cousin of dividends. Dividends were taxed in the shareholder's hands at slab rate, while buyback proceeds were tax free because the company had already paid the 115QA tax. That gap is now gone. From October 2024 both dividends and buyback proceeds are taxed in your hands at your slab rate as ordinary income, so the headline tax treatment of receiving cash through either route is broadly aligned.

The remaining difference is structural rather than about the tax rate. With a dividend, every shareholder receives cash and there is no capital loss to harvest. With a buyback, only those who tender receive cash, and tendering investors generate a capital loss equal to their cost of acquisition that can be carried forward. For an investor sitting on large unrealised capital gains elsewhere, that carry-forward loss can be quietly valuable, which is now one of the few genuine tax angles left in buybacks.

Should You Tender Your Shares?

There is no one size answer, but the decision now hinges heavily on your tax slab. If you are in the 30% bracket, the deemed dividend tax can swallow a large slice of the premium the buyback offers, so the buyback price needs to be well above the market price to leave you better off than simply selling on the exchange and paying capital gains tax instead. Selling on the market triggers STCG at 20% if held under a year or LTCG at 12.5% above the Rs 1.25 lakh annual exemption if held longer, which is often lighter than 30% slab dividend tax.

So a high-slab investor holding long-term shares might be better off selling in the open market near the buyback price and paying 12.5% LTCG, rather than tendering and paying 30% on the whole amount as dividend. A low-income investor whose slab rate is below the LTCG rate might prefer to tender. Run both numbers before the tender window closes. The acceptance ratio also matters, because unaccepted shares come back to you and remain subject to normal market risk.

SEBI Rules and Common Pitfalls

The SEBI Buyback Regulations, 2018, govern the process. Key limits include the 25% cap on paid-up capital and free reserves in a financial year, the requirement to fund buybacks only from free reserves, securities premium, or fresh issue proceeds, and the 2 to 1 post-buyback debt to equity ceiling. Companies must also complete a board-approved buyback within strict timelines and cannot launch another buyback within a cooling period. These rules exist to stop firms from over-leveraging themselves just to support a share price.

• Assuming buyback cash is still tax free: it is not, from October 2024 it is deemed dividend at your slab.
• Forgetting the capital loss: failing to record the cost-of-acquisition loss means you lose a legitimate carry-forward benefit.
• Tendering blindly at high slab: a 30% slab investor can end up worse off than simply selling in the market.
• Ignoring the acceptance ratio: assuming all your shares will be bought when only a fraction may be accepted.
• Chasing the entitlement: buying just before the record date purely to grab the small-shareholder reservation, while ignoring the price risk on returned shares.

Sources and Further Reading

For authoritative data and current rules, refer to SEBI (Securities and Exchange Board of India), the Income Tax Department, and NSE India. Tax law changes frequently, so always confirm the latest rates and the buyback offer's specific terms on the official source, and consult a qualified tax adviser before you tender shares.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to SEBI (Securities and Exchange Board of India), Income Tax Department and NSE India. Always confirm current rules, rates and contract specifications on the official source before you trade.