Buy back of shares

You cannot do a direct, selective buy-back from only two shareholders due to the rule requiring proportional offers to all shareholders, nor can you exceed the 25% paid-up capital limit in a single financial year. To achieve the exit of these two shareholders, you must either use a proportional buy-back where the other four shareholders abstain (if the total is under 25%), execute a Selective Capital Reduction via NCLT approval (Section 66), or have the two individuals transfer their shares privately to the remaining shareholders.

One important tax angle to add to the corporate law guidance above.

Finance Act 2024 changed the buyback tax structure significantly, and this directly affects the economic outcome for the two exiting shareholders.

BEFORE October 1, 2024: The company paid a 115QA buyback distribution tax at an effective rate of 23.296%. The shareholders received the buyback proceeds COMPLETELY TAX-FREE under Section 10(34A). Net result: tax hit was on the company.

FROM October 1, 2024 ONWARDS: Section 115QA is abolished. Section 10(34A) exemption is removed. The ENTIRE buyback consideration received by each exiting shareholder is now treated as deemed dividend and taxed in their individual hands at their applicable slab rate. They CANNOT deduct their original cost of acquisition from the proceeds. So if shares were originally bought at Rs 100 and the buyback price is Rs 2,000 per share, the full Rs 2,000 is income, not just the Rs 1,900 gain.

For resident individual shareholders in the 30% slab, this can make the effective tax cost substantial. This should be factored into the buyback price negotiation, and possibly into the choice between buyback versus a private share transfer under the Companies Act (which would be taxed as capital gains with indexation benefit, potentially more favourable depending on holding period).

For the full breakdown of the new buyback tax rules and a comparison with share transfer, this [buyback tax guide](https://taxgarden.in/blog/tax-on-buyback-of-shares-india-section-115qa-new-rules-2026) has the post-October 2024 structure.