Buyback of Shares in India (2026): Section 68 Rules, the New Shareholder Tax After 1 October 2024, and the ESOP-Liquidity Playbook

By CS Sapna Malpani, Practising Company Secretary, Bangalore  |  Last updated: 12 July 2026

A buyback of shares used to be the tax-smart way for an Indian company to return cash to its shareholders. That maths flipped on 1 October 2024. The company-level buyback tax under Section 115QA is gone, and the entire buyback amount now lands as a dividend in the shareholder’s hands, taxed at slab rates that can touch 35.88% for an individual promoter. Get the Section 68 process wrong on top of that, and the penalty is not a slap on the wrist: up to ₹3 lakh on the company, ₹3 lakh on each officer in default, and imprisonment of up to three years. This guide walks every private company, founder and CFO through the buyback of shares as it actually works in 2026: the rules, the forms, the tax, and the ESOP-liquidity angle that most cap tables get wrong.

Why founders are rethinking buyback in 2026

Three groups keep asking about buyback of shares this year, and for very different reasons.

A profitable private company sitting on surplus cash wants to reward shareholders and lift earnings per share without committing to a recurring dividend. A funded startup wants to give early employees and angel investors a clean exit, whether an ESOP buyback or a secondary, without waiting for an IPO that may be years away. And a promoter group wants to consolidate its holding as smaller investors cash out. All three routes run through the same statute: Sections 68, 69 and 70 of the Companies Act 2013, read with Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.

What changed is the economics. Until 30 September 2024, the company paid a flat buyback tax of roughly 23.3% under Section 115QA and the shareholder received the money tax-free under Section 10(34A). From 1 October 2024, the Finance (No. 2) Act, 2024 repealed that regime. Now the whole amount is treated as a dividend under the new Section 2(22)(f) and taxed at the shareholder’s own slab. For a promoter in the top bracket that is a jump from a shared 23.3% to as much as 35.88% borne personally. The process rules did not soften to match, so the cost of getting the compliance wrong has effectively gone up.

Board route or special resolution? Start here

The 10% Board-only route is the workhorse for small, quick buybacks, such as an ESOP liquidity round. Anything larger, up to the 25% ceiling, needs a special resolution at a general meeting. Note that the two ceilings are measured slightly differently: the Board route is capped at 10% of paid-up equity capital and free reserves, while the outer 25% limit is measured against total paid-up capital and free reserves.

What is a buyback of shares under Section 68?

A buyback of shares is a company purchasing its own shares (or other specified securities) out of its own funds, then cancelling them. The share count drops, each remaining shareholder owns a larger slice, and surplus cash leaves the balance sheet. Section 68 permits it only from three sources: the company’s free reserves, its securities premium account, or the proceeds of an earlier issue of a different kind of shares or securities. A buyback can never be funded from the proceeds of an earlier issue of the same kind of shares.

Before any board approves a buyback, seven conditions in Section 68(2) have to be satisfied. Miss one, and the buyback is exposed to challenge and to the Section 68(11) penalty.

Two more bars sit outside that table. A company cannot buy back its shares while a default in repaying deposits, redeeming debentures or preference shares, paying a declared dividend, or repaying a term loan to a bank or financial institution is subsisting. The buyback can proceed only once the default has been remedied and three years have passed. And a company cannot buy back through any subsidiary, investment company, or if it has defaulted on its annual filings under Sections 92 and 137.

The penalty for getting it wrong

Buyback is one of the corners of the Companies Act where the criminal penalty survived the decriminalisation drive of 2019 and 2020. Section 68(11) still carries a jail clause for officers, which makes it heavier than the civil-penalty regime that now governs most filing defaults.

Compare that with a routine annual-return delay, where the exposure is a per-day civil penalty and no jail. The buyback penalty is deliberately harsher because a botched buyback touches creditors’ interests: cash leaves the company, and the law wants directors personally on the hook if they take it out improperly.

The tax shift that changed the calculus

This is the part every founder and CFO needs to sit with before signing a buyback resolution. The share buyback tax did not just move. It moved from a predictable, shared, flat rate to a variable rate that individual shareholders bear entirely.

The capital-loss twist is the subtle bit. Under the new regime, the sale consideration for the shares is deemed to be nil, so the shareholder’s original cost of acquisition converts into a capital loss. That loss can be set off against other capital gains and carried forward for up to eight assessment years, which is a genuine cushion for a shareholder who has other gains to offset and a dead weight for one who does not. A founder returning ₹1 crore to angels through a buyback in 2026 has to model the angel’s slab rate and their ability to use that capital loss, not just the company’s cash outflow. That is a different planning conversation from the one that worked in 2023.

The buyback process, step by step

For an unlisted company, the procedure runs through Rule 17. Listed companies follow the SEBI (Buy-back of Securities) Regulations, 2018 on top of Section 68. Here is the unlisted sequence a Company Secretary drives.

Step 1. Articles and eligibility. Check that the Articles of Association authorise buyback. If they do not, amend them by special resolution first. Run the numbers on the 25% limit, the 2:1 post-buyback debt-equity test, and confirm no subsisting default blocks the company.

Step 2. Approval. For a buyback up to 10% of paid-up equity and free reserves, a Board resolution is enough. Beyond that, up to 25%, call a general meeting and pass a special resolution. The explanatory statement must disclose the necessity, the class of shares, the amount, the time-bound programme and the promoters’ intent.

Step 3. Offer documents. File Form SH-8 (the letter of offer) with the Registrar of Companies, accompanied by Form SH-9, the declaration of solvency signed by at least two directors, one of whom must be the managing director where there is one. The declaration confirms the company can meet its liabilities for the next year.

Step 4. Run the offer. Keep the offer open for a minimum of 15 days and a maximum of 30 days. Verify the acceptances within 15 days of closure. Open a separate bank account for the buyback consideration.

Step 5. Pay and extinguish. Pay the consideration within 7 days of verifying acceptances. Extinguish and physically destroy the bought-back shares within 7 days of completing the buyback.

Step 6. File and record. File the return of buyback in Form SH-11 with the ROC within 30 days of completion, attaching the compliance certificate in Form SH-15 signed by two directors. Maintain the register of bought-back shares in Form SH-10 at the registered office, in the Company Secretary’s custody. Do not issue the same kind of shares within the next 6 months, except by way of a bonus issue or to discharge subsisting obligations such as ESOP, sweat equity or conversion.

Buyback for ESOP liquidity: the startup angle

For a venture-backed company, buyback is often less about capital structure and more about people. Employees who have exercised their stock options hold shares with no market to sell into. A buyback lets the company purchase those shares and hand the employee real cash, the ESOP liquidity event that retention actually depends on.

Two cautions here. First, the 10% Board route is attractive for a modest annual ESOP buyback, but the moment the programme crosses 10% of paid-up equity and free reserves, a special resolution and the fuller SH-8 process kick in. Second, the tax shift bites employees too: post-1 October 2024, the buyback amount is a deemed dividend in the employee’s hands at slab rate, on top of the perquisite tax they already paid at exercise. A cleaner alternative for some cap tables is a secondary sale to an incoming investor, where the employee is taxed on capital gains rather than as a dividend. According to CS Sapna Malpani, the right structure is now a tax-planning decision as much as a Companies Act one, and it should be modelled per shareholder class before the board commits to a route. Expect more startups through 2026 to pair a small Section 68 buyback with a secondary tranche, rather than run everything through buyback the way they did before the rules changed.

Buyback vs dividend vs capital reduction

Founders often confuse three different ways of returning value, and the wrong label can mean the wrong process and the wrong tax. A dividend distributes profits without touching share count and is taxed as dividend income, but it needs distributable profits and does not consolidate holdings. A capital reduction under Section 66 is a tribunal-approved route (NCLT) used for larger restructurings and cancelling unpaid or surplus capital; it is slower and needs a formal petition. A buyback under Section 68 sits in between: no tribunal needed for the standard route, it shrinks share count, and it works within the 25% ceiling. Choosing between them is where a Company Secretary earns their fee, because each carries a different approval, timeline and tax profile.

Sources and References

• Section 68, Companies Act 2013, Power of company to purchase its own securities (India Code / ca2013.com)
• Rule 17, Companies (Share Capital and Debentures) Rules, 2014 (ca2013.com)
• Buyback of Shares under Sections 68 to 70: process, limits and forms (TaxGuru)
• The New Tax Landscape for Buy-Backs, Finance (No. 2) Act, 2024 (Mondaq)
• Compliance checklist for buy-back of equity shares (SCC Online)
• FAQs on Share Buybacks (Vinod Kothari & Co.)

Frequently Asked Questions

What is the buyback of shares under Section 68 of the Companies Act?

A buyback of shares is a company purchasing its own fully paid-up shares from existing shareholders using its free reserves, securities premium account, or the proceeds of a fresh issue of a different class of securities. The bought-back shares are cancelled and destroyed, which reduces the share count and returns cash to shareholders. Section 68 caps the buyback at 25% of paid-up capital and free reserves in a financial year, requires a post-buyback debt-equity ratio no higher than 2:1, and mandates completion within one year of the resolution.

How is a share buyback taxed in 2026?

Since 1 October 2024, the share buyback tax has shifted entirely to the shareholder. The company no longer pays the old Section 115QA buyback tax; instead, under Section 2(22)(f), the full buyback consideration is treated as a deemed dividend and taxed in the shareholder’s hands at their applicable slab rate, which can reach about 35.88% for an individual in the top bracket. The shareholder’s original cost of acquisition becomes a capital loss that can be carried forward for up to eight assessment years and set off against other capital gains.

Can a private company use buyback to give ESOP liquidity to employees?

Yes. A buyback of shares is a common way to give employees who have exercised their stock options a cash exit before an IPO. The company can buy back up to 10% of its paid-up equity and free reserves through a Board resolution alone, which suits a modest annual ESOP liquidity round. Beyond 10%, up to the 25% ceiling, a special resolution is required. Founders should compare a buyback with a secondary sale to an incoming investor, because after the 2024 tax change the employee is taxed on buyback proceeds as a dividend at slab rate, whereas a secondary is taxed as capital gains.

What is the penalty for a defective buyback of shares?

Under Section 68(11), if a company defaults in complying with Section 68 or the SEBI buyback regulations, the company is punishable with a fine of ₹1 lakh to ₹3 lakh, and every officer in default is punishable with imprisonment of up to three years, or a fine of ₹1 lakh to ₹3 lakh, or both. Buyback is one of the few Companies Act provisions where the imprisonment clause survived the 2019–2020 decriminalisation, because an improper buyback can prejudice creditors by taking cash out of the company.

Which forms are filed for a buyback of shares?

An unlisted company files Form SH-8 (the letter of offer) and Form SH-9 (the declaration of solvency signed by two directors including the managing director) with the Registrar of Companies before the offer. During the process it maintains the register of bought-back shares in Form SH-10. After completion, within 30 days, it files the return of buyback in Form SH-11 along with the compliance certificate in Form SH-15. Bought-back shares must be extinguished and physically destroyed within seven days of completion.

How often can a company do a buyback of shares?

A company cannot make a fresh buyback offer within one year of the closure of its previous buyback offer. Each buyback must also be completed within one year of the date of the enabling resolution. In practice this means a company can run one buyback programme per year, and it should sequence any ESOP liquidity rounds and promoter consolidation within a single well-planned offer rather than attempting overlapping buybacks.

This article is general information on the buyback of shares under the Companies Act 2013 and current tax law, not legal or tax advice. Verify figures against the bare Act and consult a Practising Company Secretary before acting. Prepared by CS Sapna Malpani, Practising Company Secretary, Bangalore.