Guide · Corporate actions · Updated 2026-09-23

A buyback price is paid only on the shares the company accepts, and since 1 April 2026 it is taxed as a sale again

A buyback announcement leads with one number, the price, and it applies only to the shares the company takes. The rest of what a holder tenders comes back, to be sold at whatever the market pays once the offer has gone. The outcome is decided between those two prices: by an entitlement fixed on the record date, a redistribution of shares other holders did not tender, and a tax treatment that has changed three times since 2019. This page works that arithmetic end to end on one illustrative offer, underneath the ground covered in what a buyback does to the share count and to value.

A fixed price on an unknown quantity

Regulation 4(iv) of the SEBI (Buy-Back of Securities) Regulations 2018 allows three methods: a tender offer to existing holders on a proportionate basis, and open market purchases through book building or through the stock exchange. The regulator's own count for FY2018 to FY2022, in the board memorandum it approved in December 2022, was 151 companies through the tender route, 66 through the stock exchange and none through book building.

The tender offer is a fixed price attached to a rationing rule. The company announces a price, a number of shares and a record date, and the register at that date fixes who may tender and how many shares the company must accept from each. Holders tender through a separate acquisition window of a designated exchange; tendered shares are marked under lien in the holder's own demat account and released at settlement if the company does not take them. The price is known from the announcement. The quantity is known only after the window closes.

The exchange route is the reverse: a spending target with no price offered to anyone. The company bids in the ordinary order book up to a maximum price, and a seller receives whatever the matched trade prints. Whether the company's order was the one on the other side is a matter of queue position.

Why the exchange route was withdrawn, and why it came back

SEBI's December 2022 memorandum gave three reasons for phasing the exchange route out. Price-time matching meant one seller's entire order could fill against the company's bid, whether or not that seller meant to take part, while holders who wanted to sell into the buyback got nothing, so acceptance was "more of a matter of chance". A window of up to six months could hold artificial demand in the order book long enough to impair price discovery. And the tax: under section 115QA of the Income-tax Act 1961 the company paid the buyback tax, so the sellers who happened to be matched took their gains untaxed while the rest were shut out, an outcome the memorandum called iniquitous.

The same memorandum recorded that SEBI had proposed to the Government that the buyback tax be moved from the company to the shareholders who tender. The route was cut on a glide path written into regulations 4(iv) and 17(ii) in 2023: below 10 per cent of paid-up capital and free reserves and 66 working days for offers opening from 1 April 2023, 5 per cent and 22 working days from 1 April 2024, and no new offers from 1 April 2025.

The tax then moved twice, and the route followed it. Once the Finance Act 2026 made buyback proceeds capital gains again, a holder selling into the company's bid and a holder selling to anyone else were taxed alike. SEBI's consultation paper of 8 May 2026 said so directly: the separate window had existed mainly to identify investors eligible for beneficial tax treatment, and that treatment was gone. The SEBI (Buy-Back of Securities) (Amendment) Regulations 2026, notified on 1 July 2026, reopened the route from 1 August 2026: below 15 per cent of paid-up capital and free reserves, open within four working days of the announcement and closed within 66 working days, promoter holdings frozen at the ISIN level until the offer closes, and no separate window or display of the company's identity on the screen. The same notification bars any buyback that would breach minimum public shareholding and makes a merchant banker optional.

Two classes of page are now wrong at once. Anything written between October 2024 and March 2026 describes buyback proceeds as a dividend taxed at the slab. Anything written between April 2025 and July 2026 describes the tender offer as the only route a listed company has.

The record date fixes who, how many and which category

The timetable is short and every step has a ceiling. The announcement must name the record date (regulation 9(i)), tendering opens within four working days of it (regulation 9(v)) and stays open for five (regulation 9(vi)), and accepted shares are paid for and the rest released within five working days of closing (regulation 10(ii)).

Three things are fixed at the record-date close, and none of them can be repaired afterwards.

Eligibility. Indian equities settle on T+1, so a purchase must be made by the trading day before the record date for the buyer to be on the register when it is struck. Shares bought later cannot be tendered, and no holder can have more shares accepted than they held on the record date.

Category. A small shareholder is one whose holding is worth no more than ₹2 lakh at the record-date close on the exchange with the highest trading volume that day (regulation 2(1)(n)). Demat accounts are clubbed where the sequence of permanent account numbers matches (explanation to regulation 9(ix)), so splitting a holding across accounts under the same PAN does not create two small shareholders. At a close of ₹1,000 the line is 200 shares. A holder of 190 shares falls into the general category if the record date closes above ₹1,052.63, a rise of 5.3 per cent in one session: the category is decided by a price that nobody knows until that session ends.

Entitlement. The number of shares the company must accept if tendered. Until one working day before the record date the board may raise the price and cut the share count, keeping the total size unchanged (regulation 5(via)), which lowers every ratio.

Entitlement is a ratio of holdings, and the reservation bends it

The illustrative offer used for the rest of this page: 1 crore shares outstanding, 60 lakh of them held by promoters who have declared that they will not tender, and 4 lakh held by small shareholders on the record date. The company offers to buy 4,00,000 shares at ₹1,200 against a record-date close of ₹1,000. Every input is illustrative.

Regulation 6 reserves for small shareholders the higher of 15 per cent of the offer or the number they would be entitled to in proportion to their holding. Here the proportionate share is 40,000 and the floor is 60,000, so the floor governs: 20,000 shares of entitlement move from the general category to the small one, lifting the small ratio from the 10 per cent everyone would otherwise share to 15 per cent and cutting the general ratio to 9.44 per cent.

The promoter line matters as much. Since the amendment of 20 November 2024, shares of a promoter who declares non-participation are left out of the entitlement computation altogether (proviso to regulation 4(iv)(a)). Had the 60 lakh promoter shares stayed in the general denominator, the general ratio would have been 3.54 per cent. Under the 2026 tax rules a tendering promoter pays an additional tax, which gives promoters a reason to declare, and each declaration raises the public ratio.

The pattern holds in real offers. In a tender offer filed with SEBI in February 2026, the record-date close of ₹517.35 put the small-shareholder line at 386 shares. Small shareholders' proportionate share of the offer was 1,14,507 shares and the 15 per cent floor raised it to 1,33,970, which produced ratios of 10.67 per cent for small shareholders and 8.90 per cent for the general category, with the promoter group excluded from the computation.

Entitlements are whole shares. Letters of offer ignore the fraction, and a small shareholder whose entitlement rounds to zero is given one share in preference if they tender. At a 15 per cent ratio, any holding of six shares or fewer rounds to zero.

The acceptance ratio is the entitlement divided by participation

The basis of acceptance runs in three passes (regulation 9(x)). First, every tender is accepted up to the holder's entitlement. Second, shares left over in a category, because some holders did not tender, go to the holders in that category who tendered more than their entitlement, in proportion to the excess. Third, anything still left in one category goes to the excess tendered in the other. Tendering above the entitlement is how a holder claims the entitlement others left unused, and it costs nothing in quantity: whatever is not accepted is released.

When every participant tenders its whole holding, the arithmetic collapses to one line. The acceptance ratio in a category equals its entitlement ratio divided by the share of the category's holdings tendered, capped at 100 per cent, with any unfilled capacity spilling into the other category, which in this offer begins below 15 per cent participation.

For the per-holding figures, the base case tenders half the small holdings and 60 per cent of the general ones, each participant tendering everything. The proportionate factor on excess shares is then 3/17 in the small category and 34/489 in the general one, and each holder's excess allotment is rounded half up, as letters of offer do. On a real register the factor comes out marginally higher, because every entitlement is rounded down in the first pass and the discarded fractions flow into the second.

The rows that repay attention are the two holdings one share apart. The 200-share holder is small and has 60 shares accepted. The 201-share holder is in the general category and has 31. One extra share moves the holding across the ₹2 lakh line and nearly halves the quantity sold at the offer price, and any record-date close above ₹1,000 would have done the same to the 200-share holder.

The tax moved from the company, to the slab, and back to capital gains

For a listed company the regime has changed three times in seven years, and each change landed on a different taxpayer. Until 4 July 2019 a listed buyback was a capital gains event for the holder under section 46A of the 1961 Act. From 5 July 2019 the Finance (No. 2) Act 2019 extended the company-level tax in section 115QA, until then confined to unlisted companies, to listed ones, its memorandum citing listed companies buying back shares instead of paying dividends. The company paid 20 per cent on the price less the amount received when the shares were issued, 23.296 per cent with surcharge and cess, and the holder was exempt under section 10(34A).

From 1 October 2024 the Finance (No. 2) Act 2024 treated the whole amount paid as a dividend in the holder's hands under section 2(22)(f), taxed at the slab with no deduction and 10 per cent withheld under section 194, its memorandum reasoning that dividends and buybacks both distribute reserves and should be taxed alike. The cost of the shares bought back became a capital loss, computed with the consideration deemed nil, usable only against capital gains.

From 1 April 2026 the Finance Act 2026 omitted the buyback clause from the definition of dividend, section 2(40)(f) of the Income-tax Act 2025, and made the consideration chargeable as capital gains under section 69 of that Act for tax year 2026-27 onward. The gain is the price less the cost, taxed at 20 per cent short term and 12.5 per cent long term like any listed equity sale that has borne securities transaction tax, which the tender does at 0.1 per cent because it settles through the exchange. The cost is the holding's own, which after a demerger is the apportioned figure rather than the purchase price, and the holding period sets the rate as it does for any short or long term gain.

Promoters pay more: an additional 2 per cent on short-term and 9.5 per cent on long-term gains for a promoter that is a domestic company, 10 and 17.5 per cent for any other, bringing the totals to 22 and 30 per cent. At enactment the additional tax was confined to buybacks under section 68 of the Companies Act 2013, and the Income Tax Department clarified in March 2026 that a 12 per cent surcharge applies to it alone, taking a non-corporate promoter's long-term rate to 32.1 per cent before cess. For a listed company, promoter means what regulation 2(k) of the Buy-back Regulations says; the more-than-10-per-cent test applies only to unlisted companies.

The section 115QA years hid a transfer that the SEBI memorandum named. The tax came out of the company's reserves, so it was borne by every holder who did not tender. In the illustrative offer the company would have paid ₹11.09 crore on 4,00,000 shares, or ₹11.55 for each of the 96,00,000 shares left outstanding. The tendering holder's untaxed ₹1,200 was part-funded by the holders who stayed.

The deemed-dividend window inverted the arithmetic, and April 2026 undid it

Put one accepted share through each rule. It cost ₹600 more than twelve months ago, the offer pays ₹1,200, and the same share would fetch ₹1,000 in the market. To isolate the rule, every regime uses today's long-term capital gains rate with cess, 13.0 per cent, and a market sale nets ₹948 in every regime.

In the deemed-dividend window the same share returned ₹1,278 to a holder in the nil band, more than the price itself, because the dividend went untaxed and the ₹600 cost became a capital loss worth ₹78 against other gains. A holder in the top band with the capped surcharge kept ₹847.44, or ₹769.44 if the loss was never used, less than the ₹948 from simply selling the share. The same offer at the same price was worth ₹431 more per share to one holder than to another, and in the top two bands tendering at a 20 per cent premium returned less than selling the same share in the market.

That is the inversion. From April 2020, when dividends moved to the holder's slab, until September 2024, a buyback was the cheapest way to hand cash to the holders who would pay the most tax on a dividend: an individual promoter in the top band faced up to 35.88 per cent on a dividend and nothing personally on a tender, while the 23.296 per cent buyback tax was shared with every other holder. In the deemed-dividend window the tender was worth most to the holders who paid the least tax. From April 2026 a non-promoter's tender nets ₹1,122 at every slab.

The break-even has a closed form. With the capital loss usable it was the market price times one minus the capital gains rate, divided by one minus the slab rate, whatever the cost; without the loss, the market sale's net proceeds divided by one minus the slab rate. From April 2026 it is the market price itself, because a tender and a sale are taxed on the same kind of gain at the same rate.

One consequence outlives the window. The capital losses created by deemed-dividend buybacks between October 2024 and March 2026 carry forward for eight years under the ordinary rules, provided the return that created them was filed on time, and can be set off against later capital gains, including gains on buybacks under the new rules. A long-term loss meets long-term gains only. For the rate that applied to the dividend leg itself, see how dividend is taxed at the holder's slab.

A premium on part of the holding is not a premium on the holding

The headline premium is 20 per cent. The premium on the holding is the acceptance ratio times that: 6.0 per cent for the 200-share small holder with 60 shares accepted and 3.14 per cent for the 1,000-share general holder with 157 accepted, before tax, and 5.22 and 2.73 per cent after long-term tax on current rules.

The rest of the holding is exposed to the price after the offer. Against selling everything in the market during the window at ₹1,000, tendering everything wins only if the premium earned on the accepted shares covers the fall on the returned ones. The price can therefore fall by the premium times accepted shares divided by returned shares before tendering loses: to ₹962.75 for the general holder, a fall of 3.7 per cent, and to ₹914.29 for the small holder, a fall of 8.6 per cent. On current rules tax moves neither figure, because both courses tax the same kind of gain at the same rate and the comparison is scaled by the same factor.

The same arithmetic prices the right to tender before the record date. At a 30 per cent acceptance ratio and a ₹200 premium over the price the share settles at afterwards, the right attached to each share held is worth ₹60 before tax. A buyer paying more than that above the ex-entitlement price has paid for more than the offer can deliver, and the ratio is unknown at the time of purchase: every additional share tendered into a category lowers it for every holder in that category.

Tender, tender part, or hold: the decision as arithmetic

Tendering everything up to the record-date holding sells the most shares the rules allow at the offer price and cannot oversell, because the rest is released. Its cost is liquidity: tendered shares sit under lien from tender to settlement, up to ten working days for a tender on the first day, and cannot be sold in the market meanwhile.

Tendering part caps the number sold. A tender of exactly the entitlement is accepted in full and forgoes the redistributed shares. It is the right instruction only for a holder who wants to keep a stated number of shares whatever the acceptance ratio turns out to be.

Holding leaves a larger slice of a smaller company: retiring 4,00,000 of 1,00,00,000 shares raises every continuing stake by 4.17 per cent, and under the current rules the continuing holder no longer funds anyone else's exit tax. Whether the larger slice is worth more depends on the price paid against the value of the business.

For a non-promoter on current rules the decision reduces to two comparisons. Tendering everything beats holding everything if the offer price exceeds the value the holder places on a share. It beats selling everything during the window if the after-offer price stays above the break-even above. Both turn on numbers that arrive late: the acceptance ratio after the window closes, and the after-offer price after that.

Where the arithmetic goes wrong

Reading the entitlement ratio as the acceptance ratio. The first is in the letter of offer; the second depends on how many holders tender and is known only after the window closes.

Fixing eligibility and category at the wrong moment. Both are set at the record-date close, not at purchase. The last day to buy is the trading day before the record date, and accounts under the same sequence of permanent account numbers are clubbed, so splitting a holding does not keep it small.

Mixing the regimes. A buyback in February 2026 is a deemed dividend on that year's return and one in May 2026 is a capital gain, and a holder who tendered in the deemed-dividend window holds a capital loss equal to the cost of the accepted shares, which carries forward only if that year's return claimed it on time.

Treating an open market buyback as an offer. It has no premium, no entitlement and no reservation. A sale into it is a sale.

An open offer under the takeover code uses a similar tendering window and proportionate acceptance, but a third party pays and keeps the shares, so the tender has always been an ordinary sale and none of the buyback-specific tax history applies to it.

What a tender offer is actually for

A tender offer is a rationing rule attached to a price. The premium is money the company transfers to whichever holders tender, divided by rules published before anyone acts, and the tax decides how much of each share of it survives. None of that is visible in the headline price, and all of it can be computed from the letter of offer and the record-date close, except the two inputs that settle the outcome: participation and the after-offer price. Reading an offer as inputs, rules and a computation, rather than as a number with a percentage attached, is the discipline the curriculum is built to install.