Running a private company in India and planning a buy-back of shares from investors may seem straightforward, but one important consideration is the tax on buy-back of shares of an unlisted company. This topic often causes confusion for business owners and shareholders, as the rules for unlisted companies differ from those for listed companies.
In this blog, you’ll walk through what a buyback of shares really means, and how the tax rules apply specifically to unlisted companies. You’ll also find out how the tax is calculated, the difference between buyback tax in listed vs. unlisted companies, and the pros and cons of buyback for unlisted firms.
Keep scrolling to learn properly!
Quick Overview
From 1 Oct 2024, the buyback amount is treated as a deemed dividend and taxed in the hands of shareholders at their income slab rate.
Shareholders cannot claim the cost of acquisition as a deduction, but it is treated as a capital loss for set-off against future capital gains.
Listed and unlisted companies now follow the same tax treatment for buybacks post-October 2024.
Platforms like Precize allow you to access unlisted shares, pre-IPO opportunities, and global trade finance options to build a diversified portfolio.
What is Buyback of Shares?
A buyback of shares simply means a company purchasing its own shares from its existing shareholders, often at a price higher than the original issue value or fair market value. Once these shares are bought back, they are cancelled, which reduces both the company’s share capital and the number of shares in circulation.
In India, the rules for buybacks are clearly laid out in the law. The main provision is Section 68 of the Companies Act, 2013, which allows a company to go ahead with a buyback if its articles of association permit it.
For listed companies, the process is guided by the SEBI (Buy-Back of Securities) Regulations, 2018, but for unlisted companies, the safeguards and procedures under the Companies Act still apply.
At the same time, Section 70 of the Act explains situations where a buyback is not allowed, such as when the company has pending defaults or tries to carry out the buyback through its subsidiary or an investment entity.
Once the concept of buyback is clear, the next step is to know the tax rules that apply, especially for unlisted companies.
Tax on Buyback of Shares of an Unlisted Company
When it comes to the tax on buyback of shares of an unlisted company, the rules are different depending on the date of the buyback. Here’s how the tax treatment works:
From 1 October 2024, India changed how buybacks are taxed. For any buyback done on or after 1 Oct 2024, the entire amount you receive from the company is treated as a deemed dividend in your hands under section 2(22)(f) and is taxed at your applicable slab rate.
No deductions are allowed against this income (section 57 updated). For capital-gains purposes, the “consideration” for the shares bought back is deemed nil, so you record a capital loss equal to your cost of acquisition (which you can set off/carry forward as per the capital-loss rules).
Companies must deduct TDS on such dividends (section 194 for residents; section 195 for non-residents, subject to treaty), but the old company-level buyback tax does not apply to buybacks on/after 1 Oct 2024.
After looking at the tax framework, let’s explore how the calculation of buyback tax is carried out in the case of unlisted companies.
