Buyback taxation: the 2024 deemed-dividend reform

The 2024 buyback taxation reform is the change made by the Finance (No. 2) Act 2024 that, with effect from 1 October 2024, taxed share-buyback proceeds as a deemed dividend in the shareholder’s hands at slab rate under Section 2(22)(f) of the Income Tax Act 1961, abolished the company-level buyback distribution tax under Section 115QA, and turned the cost of the tendered shares into a capital loss. It shifted the entire tax burden of a buyback from the company to the investor, and it raised the effective rate for most retail shareholders. This article sets out what the reform did, the exact sections that carry it, the worked arithmetic, and where it sits in a buyback tax timeline that has now changed three times in three years.

The reform reversed the long-standing logic of Indian buyback tax. Before October 2024 the company paid a flat buyback distribution tax and the shareholder received the proceeds tax-free. After October 2024 the company paid nothing on the distribution, and the shareholder was taxed on the whole receipt as if it were a dividend, at rates running up to 35.88 per cent for resident individuals at the top slab including surcharge and cess. The cost of acquisition, the money the investor had actually put in, was not deducted from that dividend; it was parked in a separate capital-loss silo that many small investors could never use.

One date matters for reading this article correctly. The deemed-dividend regime described here governed buyback consideration received between 1 October 2024 and 31 March 2026. The Finance Act 2026 then reverted buyback taxation to capital gains for consideration paid on or after 1 April 2026. The deemed-dividend rule is therefore the rule for one defined window, FY2024-25 (from 1 October 2024) and FY2025-26, and the section below on the current position spells out the reversal.

What the reform changed

From a company-level tax to a shareholder-level tax

Under the old framework, a listed company conducting a buyback paid buyback distribution tax (BDT) under Section 115QA at 23.296 per cent (20 per cent plus surcharge plus cess) on the distributed income, the difference between the buyback price and the issue price. The shareholder received the buyback proceeds exempt from any further tax under Section 10(34A). The tax sat entirely with the company.

The Finance (No. 2) Act 2024 inverted this. From 1 October 2024:

• Section 115QA stops applying to buybacks undertaken on or after 1 October 2024, so the company pays no BDT on the distribution.
• Section 10(34A) exemption is withdrawn, so the shareholder’s receipt is no longer tax-free.
• Section 2(22)(f) deems the whole buyback consideration a dividend in the shareholder’s hands, taxed under the head “income from other sources” at the shareholder’s applicable slab rate.

No deduction against the deemed dividend

The buyback amount taxed as deemed dividend is taxed gross. No deduction is allowed under Section 57 against it, so the shareholder cannot set the purchase cost or any expense against the dividend income. For a resident individual at the highest slab the effective rate on the buyback receipt reaches 35.88 per cent, and for a foreign company 38.22 per cent, on the full amount received rather than on the gain.

The cost becomes a capital loss

The cost of the tendered shares does not vanish; it is recharacterised. Section 46A, the provision that governs capital-gains taxation on buyback, was amended with effect from 1 October 2024 so that the consideration received by the shareholder is deemed to be nil for the purpose of computing capital gains. Because the sale consideration is deemed nil and the cost of acquisition is real, the computation throws up a capital loss equal to the cost of acquisition of the shares surrendered. That loss is short-term or long-term depending on the holding period of the shares tendered.

The exact sections

Section 2(22)(f) is drafted broadly. It does not use the qualifier “accumulated profits, whether capitalised or not” that appears in the other limbs of Section 2(22), which means the deemed-dividend treatment reaches buybacks of any kind referred to in Section 68 of the Companies Act 2013, whether financed from free reserves, securities premium, or the proceeds of an earlier issue.

Worked example

Take a resident individual who bought 2,000 shares at Rs 20 each, a cost of Rs 40,000, and tendered all of them in a buyback at Rs 50 a share, a receipt of Rs 1,00,000.

• Deemed dividend: the full Rs 1,00,000 is taxed as dividend income at the investor’s slab rate. There is no deduction for the Rs 40,000 cost.
• Capital loss: Section 46A deems the consideration nil, so the computation is nil minus Rs 40,000, a capital loss of Rs 40,000.
• The trap: the Rs 40,000 capital loss can be set off only against capital gains, under the set-off rules in Sections 70 to 74. It cannot reduce the Rs 1,00,000 dividend. An investor with no capital gains carries the loss forward up to eight assessment years and, if no capital gains ever arise, never uses it.

The inequity is concentrated in this structure. The investor is taxed at slab rate on Rs 1,00,000, part of which (Rs 40,000) is a return of their own capital, while the offsetting loss is locked away in a silo many small investors cannot reach.

Capital loss: carry-forward and set-off

The capital loss generated under the amended Section 46A behaves like any other capital loss for set-off purposes, with one hard limit.

• It is reported in the capital-gains schedule of the income-tax return.
• It can be set off against other capital gains in the same year, subject to the usual rule that a long-term loss sets off only against long-term gains while a short-term loss sets off against either.
• Any unabsorbed loss is carried forward up to eight subsequent assessment years.
• It cannot be set off against income under any other head, including the deemed-dividend income taxed under income from other sources.

Where the shares were held as stock-in-trade rather than as a capital asset, the buyback amount is still treated as deemed dividend, and the purchase cost generates a business loss adjustable under the rules for profits and gains of business or profession rather than a capital loss.

TDS on buyback proceeds

The reform also brought buyback distributions into the withholding net for the first time. Because the receipt is now a dividend in the shareholder’s hands, the paying company must deduct tax at source. For a resident shareholder the company deducts 10 per cent under Section 194 on the buyback dividend. For a non-resident shareholder the deduction is under Section 195 at the rate in force, read with the relevant Double Taxation Avoidance Agreement. The shareholder claims credit for the TDS against the final liability computed at slab rate.

Where the reform sits in the buyback tax timeline

Indian buyback taxation has moved three times in quick succession, and reading any buyback transaction correctly means matching the date the consideration was received to the regime then in force.

Shares tendered before 1 October 2024 keep the old Section 10(34A) exemption. Consideration received on or after 1 April 2026 falls under the reverted capital-gains regime of the Finance Act 2026, where the gain is the buyback price minus the cost of acquisition rather than the gross receipt. The deemed-dividend regime that this article describes is the rule for the window in between.

Current position from 1 April 2026

The Finance Act 2026 reverted buyback taxation to capital gains for buyback consideration paid on or after 1 April 2026, ending the deemed-dividend experiment after 18 months. Under the reverted regime the gain is computed as the buyback consideration minus the shareholder’s cost of acquisition, so the cost is deductible against the receipt rather than stranded as a separate capital loss. The stated purpose of the reversal was to rationalise the taxation of buybacks and remove the inequitable outcome that taxed gross proceeds at slab rate. Because tax rules change with each Finance Act and the buyback regime in particular has proven volatile, confirm the regime applicable to your transaction by reference to the date the consideration was received, and consult a chartered accountant for any sizeable buyback receipt before filing.

What it meant for Zerodha investors

For an investor tendering shares in a buyback on Zerodha during the deemed-dividend window, the practical consequences were direct. The buyback proceeds credited to the trading account arrived net of 10 per cent TDS under Section 194. The whole receipt, not the gain, had to be reported as dividend income and taxed at slab rate. The cost of the tendered holding showed up as a capital loss in the capital-gains schedule, useful only if the investor had other capital gains to absorb it. The arithmetic of buyback arbitrage , buying after the announcement to tender at the buyback price, changed sharply: a high-slab investor faced slab-rate tax on the full tender amount rather than the lighter capital-gains tax that had made the strategy attractive, which compressed the after-tax premium for retail participants in this window.

What can go wrong

• Matching the wrong regime to the date: the rule turns on when the buyback consideration was received, not when the shares were bought. Confirm whether the receipt fell before 1 October 2024, in the 1 October 2024 to 31 March 2026 window, or on or after 1 April 2026.
• Expecting the cost to reduce the dividend: during the deemed-dividend window the purchase cost did not reduce the dividend income. It only created a capital loss usable against capital gains.
• Forgetting the TDS credit: 10 per cent was withheld at source under Section 194. Claim the credit in the return so it is not lost.
• Carrying a loss you can never use: a capital loss with no offsetting capital gains expires after eight assessment years unused.

See also

• Buyback tender offers on Zerodha
• How to tender shares in a buyback on Zerodha
• Capital gains tax in India
• Securities transaction tax
• Grandfathering rule for LTCG
• Tax on listing-day gains
• Offer for sale on Zerodha
• How to tender shares in an open offer on Zerodha
• How to participate in a delisting offer on Zerodha
• Follow-on public offer on Zerodha
• Rights issue
• How to renounce a rights entitlement on Zerodha
• IPO process in India
• Promoter
• SEBI (ICDR) Regulations 2018
• SEBI
• National Stock Exchange
• Bombay Stock Exchange
• CDSL
• Zerodha
• Kite by Zerodha
• Demat account

External references

• Income Tax Department, Acts and Finance Acts
• Income Tax Act 1961, Section 2(22) and Section 46A
• SEBI (Buy-Back of Securities) Regulations 2018
• CBDT circulars on buyback TDS under Section 194
• Ministry of Finance, Budget documents

References

1. Finance (No. 2) Act 2024, insertion of Section 2(22)(f) and amendment of Section 46A and Section 115QA, effective 1 October 2024.
2. Income Tax Act 1961, Sections 2(22)(f), 46A, 57, 70 to 74, 115QA (pre-amendment), 10(34A) (pre-amendment), 194 and 195.
3. Companies Act 2013, Section 68 (power of a company to buy back its own securities).
4. SEBI (Buy-Back of Securities) Regulations 2018, tender offer and open-market routes.
5. Finance Act 2026, reversion of buyback taxation to the head capital gains for consideration paid on or after 1 April 2026.