Not taxable (earlier buyback tax of 20% has been removed)
Shareholder
Two-step treatment (see below)
In the hands of the Shareholder:
1. Deemed Dividend u/s 2(22)(f): The entire buyback price paid by the company is treated as deemed dividend and taxed under IFOS. No deduction is allowed against this dividend income.
2. Capital Loss: Capital loss arises as follows:
Particulars
Amount
Sale Consideration
Nil (treated as Nil)
(-) Cost of Acquisition of shares
(XX)
Short-Term / Long-Term Capital Loss
(XX)
The nature (STCL/LTCL) depends on the period of holding of the shares.
### Buyback by Foreign Company
Party
Tax Treatment
Foreign Company
Not Taxable
Shareholder
Normal Capital Gain (Sale Price − COA) — no deemed dividend treatment
### Significance of the New Regime
Under the earlier regime, the company paid 20% buyback distribution tax and the shareholder was exempt. Under the new regime, the company is not taxed but the shareholder pays tax at slab rate on the entire buyback price as dividend, while getting a corresponding capital loss to set off against other capital gains.
Worked example
### Example 1
Example: Mr. Aman purchased 1,000 shares of Tata Ltd. in 2020 at ₹40/share (Total cost ₹40,000). Tata Ltd. buys back these shares at ₹60/share (Total ₹60,000).
Long-Term Capital Loss = ₹40,000 (since shares held > 12 months)
This LTCL can be carried forward and set off against future LTCG.
⚠️ Common exam mistakes
Treating only the premium (buyback price − issue price) as dividend — the entire buyback price is dividend now.
Forgetting to claim the capital loss (which is generated automatically).
Applying the same treatment to foreign company buyback — foreign company buyback is taxed as normal capital gain, not deemed dividend.
Bare-Act text Section 46A read with Section 2(22)(f) · Income-tax Act, 1961 · click to expand
Notwithstanding anything contained in section 45, where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.