Buybacks, Bonus Shares and Splits

A shareholder who tendered shares in a buyback in 2025 found the whole amount received taxed as dividend at slab rates, with the cost left behind as a capital loss. A shareholder who tenders in a buyback after 1 April 2026 is back to capital gains, unless the shareholder is a promoter, who pays an additional tax. Bonus shares come with a cost of nil and a holding period that starts afresh. A share split leaves both cost and holding untouched, although no section of the Act says so in terms about the holding period. This guide takes each corporate action in turn, under the law for each period.

Which Act applies

• Buybacks, sales and allotments up to 31 March 2026 fall under the Income-tax Act, 1961. Assessment year 2026-27 (financial year 2025-26) is the last year under it.
• From 1 April 2026 (tax year 2026-27) the Income-tax Act, 2025 applies, as amended by the Finance Act, 2026 (section 536 saves the 1961 Act for earlier years).

Buybacks: three regimes in three years

Before 1 October 2024: tax on the company

Under section 115QA, a domestic company paid additional tax of 20 per cent on “distributed income” on a buyback, and the shareholder’s income was exempt under section 10(34A). The Finance (No. 2) Act, 2024 switched both off for “any buy-back of shares, that takes place on or after the 1st day of October, 2024”.

1 October 2024 to 31 March 2026: dividend in the shareholder’s hands

From 1 October 2024, the definition of dividend in section 2(22) includes:

“(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013”.

Three consequences follow for buybacks in financial years 2024-25 and 2025-26.

1. The whole payment is dividend, taxed as income from other sources at the shareholder’s normal rates. Clause (f) is not limited to accumulated profits, unlike clauses (a) to (e).
2. No expenses are deductible against it. Section 57(i) allows commission for realising dividends “other than that referred in sub-clause (f)”.
3. The cost becomes a capital loss. The proviso to section 46A provides that, for a buyback on or after 1 October 2024, “the value of consideration received by the shareholder shall be deemed to be nil”. The capital gain is therefore minus the cost. The loss is short-term or long-term according to the holding period. It can be set off against capital gains and carried forward for eight years (section 74), but not against the dividend or any other head.

The company deducts tax at 10 per cent from a resident shareholder under section 194, which since 1 October 2024 names sub-clause (f).

In the return for AY 2026-27. ITR-2 and ITR-3 carry a line in Schedule CG for “Capital Loss on buy back of shares”: item A(A) for short-term and item B(A) for long-term. The form notes that the loss “can be claimed only if respective Dividend income u/s 2(22)(f) is offered” in item 1a(iii) or 2d/2e of Schedule OS. The ITR-2 validation rules for AY 2026-27 enforce this (rule 600).

From 1 April 2026: capital gains again, with a promoter surcharge

The Finance Act, 2026, with effect from 1 April 2026, made two changes to the 2025 Act.

• It omitted sub-clause (f) from the definition of dividend in section 2(40). That sub-clause was the 2025 Act’s copy of section 2(22)(f).
• It substituted section 69(2) and (3). The old section 69(2), which deemed the consideration nil, has gone.

What remains is section 69(1). Where a shareholder receives consideration from a company “for the purchase of its own shares or other specified securities”, the difference between the cost and the consideration is “Capital gains” in the year of the buyback. The ordinary rules for holding period and rates apply (see Capital Gains on Listed Shares and Equity Funds).

Promoters pay more. Under the new section 69(2), where the buyback is under section 68 of the Companies Act, 2013 and the shareholder is a promoter, the tax is the normal tax plus an additional income-tax:

Gain	Additional rate: promoter is a domestic company	Additional rate: any other promoter
Short-term gain referred to in section 196	2 per cent	10 per cent
Long-term gain referred to in section 197 or 198	9.5 per cent	17.5 per cent

Added to the 20 per cent rate in section 196 and the 12.5 per cent rate in sections 197 and 198, this gives 22 per cent for a domestic company promoter and 30 per cent for any other promoter, on both short-term and long-term gains.

Section 69(3) defines “promoter”:

• for a listed company, as in regulation 2(k) of the SEBI (Buy-Back of Securities) Regulations, 2018; and
• for any other company, as a promoter under section 2(69) of the Companies Act, 2013, or “a person who holds, directly or indirectly, more than 10% of the shareholding in the company”.

Capital losses from buybacks in 2024-25 and 2025-26 that are still unabsorbed are not lost on the change of Act. Section 536(2)(n) of the 2025 Act carries forward capital losses under section 74 of the 1961 Act. They are set off “in accordance with the manner provided in the repealed Income-tax Act” against capital gains computed under the 2025 Act, up to eight years from the year in which the loss was first computed.

Bonus shares

Cost is nil. Where a shareholder “is allotted any additional financial asset without any payment”, the cost of the bonus shares “shall be taken to be nil” (section 55(2)(aa)(iiia); section 90(5)(b) and (6)(d)). The cost of the original shares is unchanged (section 55(2)(aa)(i); section 90(6)(a)). It is not spread over the bonus shares.

Holding period starts on allotment. For a financial asset “allotted without any payment and on the basis of holding of any other financial asset, the period shall be reckoned from the date of the allotment” (Explanation 1(i)(f) to section 2(42A); section 2(101)©©(IV)). Bonus shares sold within 12 months of allotment give a short-term gain, however long the original shares were held.

Bonus shares allotted before 1 February 2018. Listed bonus shares are equity shares acquired before that date, so the grandfathered cost applies. The cost is the higher of nil and the lower of the highest price on 31 January 2018 and the sale price (section 55(2)(ac); section 90(7)).

The STT condition for section 112A. For an equity share, section 112A(1)(iii)(a) requires STT to have been paid on both acquisition and transfer. Section 198(1)©(i) of the 2025 Act has the same requirement. Section 112A(4) (section 198(5)) lets the Central Government notify the kinds of acquisition to which the condition on acquisition does not apply, and Notification No. 60/2018 of 1 October 2018 was issued under it.

Bonus stripping. Section 94(8) (section 175(9) and (10) of the 2025 Act) applies where a person does all of the following:

• buys securities or units within three months before the record date;
• receives bonus securities or units on them; and
• sells all or any of the original holding within nine months after the record date while still holding the bonus.

The loss on the original holding is ignored. It is instead deemed to be the cost of the bonus securities or units held on the date of sale.

Rights shares

• Shares subscribed on a rights basis cost what was paid for them, and are held from the date of allotment (section 55(2)(aa)(iii); Explanation 1(i)(d) to section 2(42A)).
• A rights entitlement renounced in favour of another person has a cost of nil, and is held from the date of the offer (section 55(2)(aa)(ii); Explanation 1(i)(e)).
• The 2025 Act counterparts are section 90(6)(b) and © and section 2(101)©©(II) and (III).

Share splits and consolidations

Cost. Where a share became the property of the assessee on “the sub-division of any of the shares of the company into shares of smaller amount”, or on a consolidation, conversion or reconversion, its cost is “calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived” (section 55(2)(b)(v); section 90(9)(d) of the 2025 Act). If one share bought for Rs 1,000 becomes ten after a split, each new share carries Rs 100 of that cost.

Holding period. Neither Act has an express clause for split shares. The bonus rule in Explanation 1(i)(f) speaks of an asset “allotted without any payment and on the basis of holding of any other financial asset”. A split does not add to the holding. It divides the same shares, and the cost provision treats the new shares as “derived” from the old. On that footing the holding is counted from the purchase of the original shares. This is the reading generally applied, but it is a reading of the Act, not a statement in it.

Grandfathering. Section 55(2)(ac) values a share by its highest quoted price on 31 January 2018. Where shares bought before 1 February 2018 were later split, that price is for a share of the old face value. Section 55(2)(ac) does not say how to apply it to the smaller shares.

What to have ready

• The buyback offer letter and the broker’s or registrar’s payment advice, with the date of the buyback and the amount. For 2025-26, also Form 16A or the AIS entry for TDS under section 194.
• Purchase records of the shares tendered, to fix the capital loss (2025-26) or gain (from 2026-27).
• The bonus or split record date and allotment date, from the company’s announcement or the demat statement.
• The 31 January 2018 highest price for pre-2018 holdings, adjusted where a split followed.
• For a promoter in a buyback after 1 April 2026, the basis on which promoter status applies (the SEBI regulation for a listed company, or the Companies Act definition or 10 per cent holding otherwise).

Due dates, payment and corrections

The dividend under section 2(22)(f) and any capital gain are both subject to advance tax (see Advance Tax and Self-Assessment Tax). The return is due by the section 139(1) date. A capital loss from a buyback can be carried forward only if that return is filed in time (section 80). After filing, the return is e-verified (see E-Verifying a Return). A buyback dividend that was left out can be added by a revised return, or later an updated return. Where the dividend was not offered, the Schedule CG validation rule prevents the matching capital loss from being claimed.

Summary

1. Buybacks before 1 October 2024: tax on the company under section 115QA, exempt for the shareholder.
2. Buybacks from 1 October 2024 to 31 March 2026: the whole payment is dividend under section 2(22)(f), with 10 per cent TDS. The cost is a capital loss under the proviso to section 46A, reported only if the dividend is offered.
3. Buybacks from 1 April 2026: capital gains under section 69(1) of the 2025 Act, after the Finance Act, 2026 omitted section 2(40)(f). Promoters pay additional tax, giving 22 or 30 per cent in total.
4. Bonus shares: cost nil, holding from allotment, grandfathered cost if allotted before 1 February 2018, and bonus stripping caught by section 94(8) (section 175(9) and (10)).
5. Splits and consolidations: the original cost is spread over the new shares, and the holding period is read as running from the original purchase.

The next guide, F&O and Intraday Trading, covers share dealings taxed as business income.