A buyback isn't a share sale — it's the company buying its own shares back and cancelling them (and the tax just flipped)
When a founder or an investor wants cash off the table, someone usually says "let's do a buyback". But a statutory buyback is not one shareholder selling to another — that is a secondary sale. A buyback is the company itself using its own reserves to purchase its shares and then permanently extinguish them, shrinking the share capital. It is governed by Sections 68 to 70 of the Companies Act, 2013, with strict limits on how much, how often and from where. And from 1 October 2024 the tax on it changed completely — it now lands on the shareholder, not the company. Here is how a buyback works, and who pays what now.
Buyback vs secondary sale — don't confuse the two
The two get used interchangeably and they are not the same. A secondary sale is one shareholder selling their shares to another buyer; the money moves between people and the shares survive on the cap table. A buyback is the company buying its own shares out of its reserves and cancelling them, so the total number of shares falls. Both can give a shareholder an exit, but the approvals, the mechanics and — especially now — the tax are entirely different. Choosing the wrong one is an expensive mistake.
Where the money can come from (Section 68)
A company cannot fund a buyback from just anywhere. Section 68 permits only three sources:
- its free reserves;
- the securities premium account; or
- the proceeds of a fresh issue of shares or other specified securities — but not out of the proceeds of an earlier issue of the same kind of shares.
The shares being bought back must also be fully paid up.
The limits: 25%, the two approval routes, and the 2:1 debt test
Three numbers govern how much you can buy back:
- Quantum. In any financial year, the buyback cannot exceed 25% of the total paid-up capital and free reserves of the company. For a buyback of equity shares, that 25% is measured against the paid-up equity capital in that financial year.
- Approval route. A buyback of up to 10% of the paid-up equity capital and free reserves can be authorised by a board resolution alone. Beyond that, and up to the 25% ceiling, it needs a special resolution (75%) of the members.
- Debt test. After the buyback, the company's total secured and unsecured debt must not be more than twice its paid-up capital and free reserves — the 2:1 ratio.
The process and the forms
The compliance trail is specific and time-bound:
- Pass the board or special resolution (with full disclosure in the explanatory statement where a special resolution is used).
- File the letter of offer in Form SH-8 and a declaration of solvency in Form SH-9 — signed by at least two directors, one of them the managing director, and verified by affidavit — with the Registrar.
- Make the offer to shareholders and complete the buyback within one year of the resolution.
- Extinguish and physically destroy the bought-back shares within 7 days of completion.
- Maintain the register of buyback in Form SH-10, and file the return of buyback in Form SH-11 within 30 days, with a compliance certificate.
- Where the buyback is out of free reserves or the securities premium, transfer a sum equal to the nominal value of the shares bought back to the Capital Redemption Reserve (Section 69).
The cooling-off rules
Two waiting periods stop a company from using buybacks to churn its capital. There can be no further buyback offer within one year of the closure of the previous one. And the company cannot make a fresh issue of the same kind of shares for six months after the buyback — with narrow exceptions such as bonus shares or the discharge of subsisting obligations like ESOPs, sweat equity, or the conversion of preference shares or debentures.
The big change: from 1 October 2024, the shareholder pays the tax
This is the part that has changed the whole calculation, and many people have not caught up with it. Until 30 September 2024, the company paid a buyback distribution tax of 20% (plus surcharge and cess) under Section 115QA, and the amount received was tax-free in the shareholder's hands. That regime is gone.
From 1 October 2024, under the Finance (No. 2) Act, 2024:
- The entire buyback consideration is treated as a deemed dividend in the shareholder's hands under Section 2(22)(f), taxed as "Income from Other Sources" at the shareholder's own slab rate. The company pays no buyback tax.
- Separately, for capital-gains purposes the consideration is deemed to be nil (proviso to Section 46A), so the shareholder's cost of acquisition of the bought-back shares becomes a capital loss. That loss can be set off against other capital gains and carried forward for up to eight assessment years — but it cannot be set off against the deemed-dividend income itself.
The net effect: a buyback used to be a tax-efficient way to return cash, taxed at a flat 20% at the company level. Now it is taxed at the shareholder's slab rate, which for a high-bracket resident individual can be materially higher. Buyback, dividend and secondary sale now sit at genuinely different tax outcomes — so the route has to be modelled, not assumed.
When a private company actually uses a buyback
Even with the tax change, buybacks still have their place: returning surplus cash to shareholders, giving a departing founder or investor an exit, buying back ESOP shares from employees who leave, consolidating ownership, or improving per-share metrics. But since October 2024 you have to weigh it against a dividend (also taxed at slab now) and a secondary sale (taxed as capital gains, often at a lower rate). The most tax-efficient way to get money out of a company is now genuinely fact-specific — which is exactly the calculation to run before you commit to a buyback.
Where this fits in running your company
A buyback is one of the ways a company deals with its share capital, so read it next to the alternatives. The dividend declaration guide covers the other way to return cash to shareholders; issuing new shares is the mirror transaction that grows the capital rather than shrinking it; and the transfer of shares with SH-4 is how a secondary sale between shareholders actually works. For the founder-and-investor liquidity angle specifically, see the secondary sale and buyback liquidity guide. All of it sits under our pillar guide to the private limited compliance calendar.
How we handle it at RDA, Baner
At RDA Advisory in Baner, Pune, we run buybacks end to end — checking the source of funds and the 25% and 2:1 limits, choosing the board-resolution or special-resolution route, preparing the SH-8 letter of offer and the SH-9 declaration of solvency, managing the extinguishment and the SH-11 return, and setting up the Capital Redemption Reserve. Just as important, we model the post-October-2024 tax in the shareholders' hands and compare it against a dividend and a secondary sale, so you pick the route that actually leaves the most money on the table. You will find us at Office No. 102, Snehraj Apartment, Baner, Pune 411045, on +91 77570 45059.
Book a consult at rdatax.in
Thinking about a share buyback — to return cash, exit an investor or clean up your ESOP shares? We will run the numbers on the company-law limits and the new shareholder-level tax, compare it with a dividend and a secondary sale, and handle the whole filing. Book a consultation at rdatax.in or call the Baner office.
Verification note: this guide explains the buyback of shares by a company under Sections 68 to 70 of the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014 — including the permitted sources of funds (free reserves, the securities premium account, or the proceeds of a fresh issue, but not the proceeds of an earlier issue of the same kind of shares), the requirement that shares be fully paid up, the quantum limit of 25% of paid-up capital and free reserves in a financial year, the board-resolution route up to 10% and the special-resolution route up to 25%, the post-buyback debt-to-capital-and-free-reserves ratio not exceeding 2:1, the forms (SH-8 letter of offer, SH-9 declaration of solvency, SH-10 register, SH-11 return within 30 days), extinguishment of the bought-back shares within 7 days, the Capital Redemption Reserve under Section 69, and the cooling-off periods (no further buyback for one year, no fresh issue of the same kind of shares for six months subject to exceptions). It also reflects the change made by the Finance (No. 2) Act, 2024: for buybacks on or after 1 October 2024, Section 115QA no longer applies and the buyback consideration is taxed as a deemed dividend in the shareholder's hands under Section 2(22)(f), with the cost of acquisition treated as a capital loss under the proviso to Section 46A. Thresholds, forms and the tax position are periodically revised and are fact-specific — confirm the current position for your company and shareholders with your CA before acting.
