A Buyback Is Now Taxed as Dividend Income, Not Capital Gains

Before 1 October 2024, tendering shares to a company’s buyback was, from the shareholder’s side, entirely tax-free. The company paid a buyback distribution tax on the surplus itself, and Section 10(34A) exempted the shareholder’s proceeds from any further tax. The Finance (No. 2) Act 2024 removed that arrangement completely.

The Whole Proceeds Are Taxed, Not the Gain

Since 1 October 2024, the company-level buyback tax is gone. In its place, the entire buyback proceeds - not the gain, the whole amount - are treated as dividend income in the shareholder’s hands, taxed at their income slab rate. The shareholder’s original cost of acquiring the shares doesn’t reduce this tax; it’s converted into a separate capital loss instead, usable only against other capital gains, not netted against the dividend income directly.

An illustrative example: shares bought at ₹100, tendered to a buyback at ₹300.

• Before October 2024: the shareholder keeps the full ₹300, tax-free. The company alone bore the tax.
• After October 2024: the full ₹300 is taxed as dividend income. At the top slab, with surcharge and cess, that’s roughly ₹108 in tax - and the ₹100 cost is now a capital loss sitting on the side, useful only if there’s another capital gain to absorb it.

TDS Lands Before the Return Settles Anything

TDS is withheld upfront too - 10% for resident shareholders, 20% for NRIs - so the cash-flow hit lands immediately, well before the eventual tax return settles the actual liability. For a shareholder in a high tax bracket without an offsetting capital gain elsewhere, a buyback that used to be a clean, tax-free exit is now one of the more heavily taxed ways to realise value from a shareholding - a genuine reversal, not a minor adjustment, and one that took effect quietly enough that plenty of investors are still tendering shares expecting the old treatment.

Check the tender date against 1 October 2024 before treating a buyback as an exit. Without an offsetting capital gain elsewhere, what used to be a clean tax-free realisation is now among the most heavily taxed ways to get value out of a shareholding.