Income Tax Law | Capital Gains
Section 46A of the Income-tax Act, 1961: Capital Gains on Buyback of Shares
Understand the tax treatment when a company buys back its own shares or other specified securities, including the October 2024 changes and the new rules effective from 1 April 2026.
What does Section 46A provide?
Section 46A governs capital gains arising when a company purchases its own shares or other specified securities from a shareholder or holder. Subject to the capital gains computation provisions in Section 48, the gain is ordinarily determined with reference to the consideration received and the cost of acquisition, in the year of the buyback.
The original provision was inserted by the Finance Act, 1999 with effect from 1 April 2000. Its operation for share buybacks changed materially on 1 October 2024. The equivalent provision in the Income-tax Act, 2025 is Section 69, effective from 1 April 2026, as amended by the Finance Act, 2026.
How share buybacks are taxed: key dates
| Buyback period | General treatment |
|---|---|
| Before 1 October 2024 | For buybacks covered by Section 115QA, the domestic company paid buyback tax and the shareholder's corresponding income was generally exempt under Section 10(34A). Other buybacks or specified securities could fall under Section 46A capital gains rules. |
| 1 October 2024 to 31 March 2026 | Consideration for share buybacks covered by Section 2(22)(f) was treated as dividend income in the shareholder's hands. Under the proviso to Section 46A, consideration for capital gains computation was deemed nil, potentially producing a capital loss equal to eligible acquisition cost, subject to applicable provisions. |
| From 1 April 2026 | Under Section 69 of the Income-tax Act, 2025 as amended by the Finance Act, 2026, buyback proceeds are dealt with under capital gains rules. Special additional tax provisions apply where the shareholder or holder is a promoter. |
The applicable law depends on the transaction date and the nature of the security and company. Dividend and capital gains provisions should not be applied simultaneously without considering the relevant statutory period.
Section 69 of the Income-tax Act, 2025: current law
Section 69(1): capital gains on purchase of own securities
Where a shareholder or holder of other specified securities receives consideration when a company purchases those securities, the capital gain is determined under Section 69(1), read with Section 72, the capital gains computation provision.
Section 69(2): additional tax for promoters
With effect from 1 April 2026, Section 69(2) provides for additional income tax on specified capital gains arising to promoters, over and above the tax otherwise payable under the Act. The additional tax rates depend on the type of promoter and gain:
| Type of capital gain | Promoter: domestic company | Promoter: other than domestic company |
|---|---|---|
| Specified short-term capital gains under Section 196 | 2% additional tax | 10% additional tax |
| Specified long-term capital gains under Section 197 or 198 | 9.5% additional tax | 17.5% additional tax |
These are additional rates on the gains specified by the statute, not universal standalone tax rates. The actual liability depends on the relevant capital gains provision and other applicable rules.
Section 69(3): promoter and specified securities
For a listed company, the term promoter follows the applicable SEBI Buy-Back of Securities Regulations. For other companies, it includes a promoter under Section 2(69) of the Companies Act, 2013, or a person directly or indirectly holding more than 10% of the company's shareholding. The term specified securities refers to the meaning in Explanation 1 to Section 68 of the Companies Act, 2013.
Illustrative capital gains calculations
Example 1: buyback from April 2026
A shareholder receives Rs. 4,00,000 on a buyback of shares with an acquisition cost of Rs. 2,50,000. Before any other permitted adjustments, the illustrative capital gain is Rs. 1,50,000 (Rs. 4,00,000 less Rs. 2,50,000). The applicable tax rate, holding period and any promoter-related additional tax must be assessed separately.
Example 2: buyback in financial year 2025-26
For a share buyback falling within Section 2(22)(f), a shareholder who received Rs. 4,00,000 and paid Rs. 2,50,000 for the shares generally had Rs. 4,00,000 treated as deemed dividend, while the capital gains consideration was deemed nil under Section 46A. This could give rise to a capital loss of Rs. 2,50,000, subject to the statutory rules on computation and set-off. It is not the treatment for buybacks governed by the April 2026 amendments.
Important legal definitions and related provisions
- Buyback of shares
- Acquisition by a company of its own shares in accordance with applicable company law, including Section 68 of the Companies Act, 2013.
- Capital gains
- Income or loss arising on transfer of a capital asset, subject to the charge and computation provisions of the applicable Income-tax Act.
- Cost of acquisition
- The amount recognised under the applicable tax provisions as the acquisition cost of the shares or securities, with adjustments where prescribed.
- Specified securities
- Securities covered by the statutory meaning referred to in Section 69(3) of the Income-tax Act, 2025 and Section 68 of the Companies Act, 2013.
- Promoter
- A person meeting the statutory promoter definition, which differs between listed and other companies under Section 69(3).
Related provisions include Section 45 (capital gains charge), Section 48 (computation), and Section 49 (cost in specified cases).
Frequently asked questions
Is every buyback taxed as a dividend?
No. The dividend treatment applied to qualifying share buybacks during the period beginning 1 October 2024. The law was revised for tax year 2026-27 onward, and the current Section 69 framework generally taxes buyback proceeds under capital gains.
What changed on 1 October 2024?
The Finance (No. 2) Act, 2024 introduced deemed dividend treatment under Section 2(22)(f) and a corresponding nil-consideration rule for capital gains under Section 46A.
Do promoters pay additional tax from April 2026?
Yes, where the specified statutory conditions apply. Section 69(2) provides additional tax on certain short-term and long-term capital gains of promoters, with different rates for domestic-company promoters and other promoters.
Does Section 46A still matter?
Yes. It remains relevant to transactions and assessments governed by the Income-tax Act, 1961. For the tax year beginning 1 April 2026, refer to Section 69 of the Income-tax Act, 2025, as amended.
Official statutory sources
- Income Tax Department: Section 46A (1961 Act)
- Finance (No. 2) Act, 2024: amendment to Section 46A
- Income-tax Act, 2025 as amended by Finance Act, 2026 (Section 69)
- Section 72 of the Income-tax Act, 2025: capital gains computation
This article provides general legal information. Tax treatment depends on transaction dates, shareholding status, facts and applicable statutory provisions.