NRI Tax on Company Buybacks vs Dividends: How the 1 October 2024 Deemed-Dividend Rule Reshaped the Maths, and What April 2026 Reverses

A reader in London held Infosys-style large-cap shares he had bought years ago for Rs 3,00,000, now worth Rs 12,00,000, and the company announced a buyback at a premium. He tendered, received roughly Rs 12,00,000, and expected to be taxed on his Rs 9,00,000 gain. Instead the company deducted tax on the full Rs 12,00,000 as a dividend, his Rs 3,00,000 cost vanished from that calculation entirely, and the only thing he got for that cost was a capital loss he had no capital gains to set it against. He paid tax on money that was partly his own returned capital. That is not a mistake by his broker. That is exactly how the law worked from 1 October 2024.

The 30-second answer: For buybacks where you receive payment between 1 October 2024 and 31 March 2026, the entire buyback amount is taxed as a deemed dividend in your hands under Section 2(22)(f), with no deduction for your cost. The company deducts TDS under Section 195 at 20% plus surcharge and cess, or the lower DTAA dividend rate (UAE 10%, UK and Canada 15%, US 25% for individuals) if you furnish a TRC and Form 10F. Your original cost becomes a capital loss under Section 46A (sale consideration deemed nil), usable only against other capital gains and carried forward eight years. Because of this, an open-market sale, taxed only on the gain at 12.5% long-term, is usually cheaper on appreciated shares. From 1 April 2026 buybacks revert to capital gains treatment.

If you are filing for last year and reconciling a buyback you tendered into, or deciding whether to tender at all, start with the ITR filing guide for NRIs, AY 2026-27, which walks through where the deemed dividend and the stranded capital loss go on the form. This guide assumes you already know what a TRC and Form 10F are and how Section 195 works in outline; if not, read the DTAA relief guide and the TDS for NRIs guide first. What follows is the part that actually moves money: how the deemed-dividend mechanic punishes the wrong holders, why the capital loss it creates is so often worthless, how a buyback compares head to head with a dividend and with simply selling, and what the 1 April 2026 reversal changes for anyone tendering this year.

The rule that flipped on 1 October 2024, and why it mattered more for NRIs

For most of the last two decades, a buyback was taxed at the company, not the shareholder. The company paid a buyback distribution tax of 20% plus surcharge and cess under the old Section 115QA, and the proceeds reached you tax-free under Section 10(34A). For an NRI this was close to ideal. You handed back your shares, received cash, and paid nothing in India because the tax had already been settled upstream. No TDS to chase, no return to file purely for the buyback, no treaty paperwork.

The Finance (No. 2) Act 2024 ended that. For any buyback where the company pays you on or after 1 October 2024, Section 115QA is gone and the entire consideration is treated as a dividend in your hands under the newly inserted Section 2(22)(f). A dividend is taxed at your applicable rate, and crucially, no cost of acquisition is deducted against it. The Rs 3,00,000 the London reader paid for his shares simply does not enter the dividend calculation. He is taxed as if the whole Rs 12,00,000 were income.

This hit NRIs harder than residents for two reasons that compound. First, a dividend to a non-resident attracts TDS under Section 195 at a higher headline rate than the 10% Section 194 rate that applies to residents, so cash is withheld at source before you see it. Second, the relief that is supposed to balance the deemed dividend, the capital loss, depends on having other capital gains to absorb it, and many NRIs who tendered into a one-off buyback had no such gains in that year. The result was tax on returned capital with no offset. Residents with active trading portfolios could at least soak up the loss; a passive NRI holder often could not.

Where your cost goes: the capital loss almost nobody can use

Here is the mechanic that catches people, and it is worth slowing down on. When your cost is denied as a deduction against the deemed dividend, the law does not let it disappear silently. Section 46A was amended so that, for a buyback on or after 1 October 2024, the sale consideration is deemed to be nil. You then compute a capital gain in the ordinary way: nil consideration minus your cost of acquisition. Nil minus Rs 3,00,000 is a capital loss of Rs 3,00,000.

That loss is short-term or long-term depending on how long you held the shares, and it follows the ordinary set-off rules. A long-term loss can be set off only against long-term capital gains; a short-term loss against either. In every case it can be set off only against capital gains, never against the dividend income from the very same buyback, and never against salary, rent or interest. If you cannot use it this year, you carry it forward for up to eight assessment years, but only if you filed your return for the loss year on time under Section 139(1). Miss the filing deadline and the carry-forward is forfeited.

For a CA advising a resident day-trader, this is a minor inconvenience. For an NRI who tendered Rs 12 lakh of inherited or long-held shares into a single buyback and has no other Indian capital gains, the Rs 3,00,000 loss is, in practical terms, worthless. There is nothing to set it against this year and, unless you happen to realise capital gains in India within the next eight years, nothing to set it against ever. You paid full dividend tax on your own returned capital and received, in exchange, a tax asset you will likely never monetise. This single asymmetry is why, for the 1 October 2024 to 31 March 2026 window, tendering an appreciated holding into a buyback was usually the most expensive way an NRI could exit it.

Put the arithmetic on the table for a UAE-resident reader who tendered shares costing Rs 4,00,000, now bought back for Rs 10,00,000, with a valid TRC and Form 10F filed so the India-UAE treaty rate of 10% applies. The deemed dividend is the full Rs 10,00,000. TDS at the 10% treaty rate is Rs 1,00,000. There is no surcharge or cess on top of a treaty rate. Separately, Section 46A hands him a capital loss of Rs 4,00,000 (nil consideration minus Rs 4,00,000 cost). If he has no other Indian capital gains, that loss does nothing for him this year. His effective cost of exiting was Rs 1,00,000 of tax on a holding that had only appreciated by Rs 6,00,000, an effective rate of about 16.7% on his actual economic gain, and he is still nursing an unusable loss.

The same shares sold on the open market: a cleaner, usually cheaper exit

Now run the counterfactual that the buyback denied him. Suppose the same UAE reader had simply sold those shares on the exchange instead of tendering. A sale of listed equity is a capital gains event, taxed under Section 112A on the gain only, not the gross proceeds. His gain is Rs 10,00,000 minus Rs 4,00,000, or Rs 6,00,000. The first Rs 1,25,000 of long-term equity gain is exempt each financial year, leaving Rs 4,75,000 taxed at 12.5%, which is Rs 59,375 plus cess.

That is Rs 59,375 of tax on a sale versus Rs 1,00,000 on the buyback, before you even count the wasted Rs 4,00,000 loss. Selling was roughly Rs 40,000 cheaper on a Rs 10 lakh exit, and it left no stranded tax asset behind. For a US-resident reader the gap is far wider, because the US treaty caps buyback dividend TDS at 25% for individuals, not the 15% people often assume. On the same numbers a US NRI tendering pays Rs 2,50,000 of TDS on the deemed dividend, against Rs 59,375 on a sale, a difference of nearly Rs 1,90,000. There is rarely a tax reason for a US-resident NRI to tender appreciated listed shares into a 2024-to-2026 buyback rather than sell.

The buyback only competes when the buyback price is materially above the prevailing market price, which it sometimes is, since companies offer a premium to induce tendering. If a buyback offers Rs 10,00,000 for shares worth Rs 8,00,000 in the market, you have to weigh the extra Rs 2,00,000 of gross proceeds against the heavier dividend tax on the whole amount. The other case where it can make sense is when you are sitting on large capital gains elsewhere in the same year that the Rs 4,00,000 stranded loss can actually absorb, turning the dead loss into a live deduction worth 12.5% or 20% of its value. Outside those two situations, on appreciated shares, a sale wins.

Buyback versus an ordinary dividend: same tax head, very different cash event

It helps to see clearly that, for this window, a buyback is a dividend in the eyes of the Act. The tax head is identical: income from other sources, taxed at your applicable rate, with TDS under Section 195 for a non-resident and the same DTAA dividend article available to cut the rate. If a company pays you Rs 1,00,000 as a regular dividend or buys back Rs 1,00,000 of your shares, the tax treatment of that Rs 1,00,000 is the same under Sections 2(22)(f) and 195.

The difference is what you give up to receive it. A dividend leaves your shareholding intact; you still own the shares and your cost base is untouched. A buyback extinguishes the shares you tender and, as we saw, converts your cost into a capital loss rather than letting it shelter the proceeds. So the honest comparison is not "buyback versus dividend tax rate", because the rate is the same. It is "a dividend that keeps my position versus a buyback that closes part of it and strands my cost". For an NRI who wants to stay invested, an ordinary dividend is plainly better; for one who wants to exit anyway, the buyback is being compared against an open-market sale, and we have already seen the sale usually wins.

There is one place the dividend route quietly costs more than people expect: the US-resident NRI. Many readers carry the rule of thumb that "the DTAA gives me 15% on Indian dividends". That is true for the UK and Canada. It is not true for the United States. Article 10 of the India-US treaty sets 15% only for a company holding at least 10% of the voting stock, and 25% for everyone else, which means every individual investor. A US-resident NRI receiving Indian dividends, or buyback proceeds taxed as a dividend, faces a 25% treaty cap, and then claims a foreign tax credit in the US restricted to the lower of the Indian tax and the US tax on that income. If your US tax on the dividend is below 25%, part of the Indian withholding becomes an unrecoverable cost. This is the single most common dividend-tax error I see US-based readers make.

Section 195 TDS on the buyback, and the documentation that sets the rate

Because the proceeds are a deemed dividend to a non-resident, the company paying you must deduct TDS under Section 195. Left to the default, it deducts at 20% plus surcharge and cess, which on a large buyback is a heavy haircut taken before the money reaches your NRO account. The lever that fixes this is your treaty, and the company will only apply the treaty rate if you put the right paper in front of it before it pays.

The documents are the same ones used for any dividend: a current-year Tax Residency Certificate from your country of residence, Form 10F filed on the income tax portal (it must now be filed electronically against your PAN), and a self-declaration of beneficial ownership and, where the treaty requires it, that you meet its limitation-of-benefits conditions. With those in place, the company withholds at your treaty dividend rate: 10% for a UAE resident, 15% for UK and Canada, 25% for a US individual. A clean and important detail: when tax is withheld at a treaty rate, no surcharge or cess is added on top, unlike the domestic rate. So a UK resident's 15% is a true 15%, while the domestic 20% becomes roughly 20.8% to 23% once surcharge and cess load on.

If you miss the documentation deadline and suffer the 20%-plus withholding, the money is not lost, but it is parked with the government until you file a return and claim the excess back, which for an NRI typically means a refund landing many months later. On a Rs 20 lakh buyback the difference between a 10% treaty deduction and a 20%-plus domestic one is over Rs 2 lakh of your cash tied up for the better part of a year. The full refund mechanics, including how the buyback dividend and its TDS appear in your Form 26AS and AIS, are in the TDS for NRIs and refunds guide. Get the TRC and Form 10F to the company's registrar before the record date, not after; once the payment is processed at the wrong rate, you are in refund territory.

Three ways to exit the same holding, side by side

The cleanest way to internalise all of this is to look at one position exited three ways. Take a UK-resident NRI holding listed shares that cost Rs 5,00,000 and are now worth Rs 15,00,000, with a TRC and Form 10F on file. Assume this is the only Indian capital gains event in the year, so there is no other gain for a stranded loss to absorb.

Exit route	What is taxed	Indian tax	Stranded loss	Position after
Buyback (1 Oct 2024 to 31 Mar 2026)	Full Rs 15,00,000 as deemed dividend at 15% treaty rate	Rs 2,25,000	Rs 5,00,000 LT capital loss, unusable this year	Shares extinguished
Ordinary dividend of equal cash	The Rs 15,00,000 distribution as dividend at 15%	Rs 2,25,000	None	Shares retained
Open-market sale	Gain of Rs 10,00,000, less Rs 1.25 lakh exemption, at 12.5%	Rs 1,09,375	None	Shares sold

The buyback and the equal-sized dividend cost the same Rs 2,25,000, because they are the same tax head, but the dividend leaves you still holding the shares while the buyback closes the position and hands you a loss you cannot use. Against a straight sale, the buyback costs Rs 1,15,625 more in tax on an identical exit, purely because it taxes gross proceeds rather than the gain. For a US resident, swap the 15% rate for 25% and the buyback's tax jumps to Rs 3,75,000, more than three times the cost of selling. The pattern holds across all four countries: between 1 October 2024 and 31 March 2026, on appreciated listed shares, selling beats tendering unless the buyback premium or an absorbable loss tips the scales.

What changes on 1 April 2026, and why it matters for anyone tendering now

The deemed-dividend experiment was short-lived. The 2024 design produced exactly the inequity the London and Dubai readers ran into, taxing returned capital and stranding the cost as a loss, and it drew enough criticism that the government reversed it. From 1 April 2026, buyback proceeds revert to capital gains treatment in the shareholder's hands. The proceeds are taxed only on the gain, that is, buyback price minus your actual cost of acquisition, at the ordinary equity rates: 12.5% long-term on listed equity above the Rs 1.25 lakh annual exemption, or 20% short-term. The cost is once again deducted directly against the proceeds, so the stranded-loss problem disappears for buybacks paid on or after that date.

For an NRI this restores the buyback to roughly the same tax footing as an open-market sale, which is how it always should have been. The premium a company offers in a buyback can then be a genuine reason to tender, because you are no longer being punished by the dividend characterisation. Note the catch for the other side: the reversal pairs minority-shareholder relief with an additional buyback tax on promoters, so the relief is squarely aimed at retail and non-promoter holders, which is where most NRIs sit.

The practical consequence for timing is sharp. If you are deciding right now, in the first half of 2026, whether to tender into a buyback, the payment date is what governs your tax, not the announcement date. A buyback where the company pays you on or before 31 March 2026 is taxed under the punitive deemed-dividend rule; the same offer paid on or after 1 April 2026 is taxed gently as capital gains. If an offer straddles the date and you have any influence over when your tender is settled, the few days can be worth a great deal of tax. Where you have no control over the settlement date, factor the regime that will actually apply to your payment into the decision to tender at all.

Edge cases worth knowing

Off-market and unlisted-company buybacks. Everything above applies to listed and unlisted companies alike, because Section 2(22)(f) and the Section 46A nil-consideration rule are not limited to listed shares. For unlisted shares the holding period for long-term status is 24 months, not 12, which matters for the character of the stranded loss and, after 1 April 2026, for the gains rate.

Shares held in an NRE versus NRO demat. The tax treatment of the buyback is the same regardless of which account holds the shares, but the repatriability of the proceeds differs. Buyback cash paid into an NRO account is subject to the usual remittance limits and the Form 15CA and 15CB process, while genuinely NRE-funded holdings retain their repatriable character. The tax does not change; the path the money takes home does.

A buyback in a loss-making position. If your shares had fallen below cost, the 2024-to-2026 rule is brutal in a different way: you still pay dividend tax on the full proceeds, and your capital loss is larger, but it is still only a loss against future capital gains. There is no scenario in that window where the deemed-dividend treatment helps a non-resident; it ranges from mildly worse than a sale to dramatically worse.

Reconciling last year's buyback on your return. If you tendered between 1 October 2024 and 31 March 2026, the deemed dividend goes under income from other sources and the capital loss goes in a separate row in Schedule CG that the ITR utility now provides specifically for Section 68 buyback losses. The loss is allowed only if you also report the corresponding dividend. File on time to preserve the eight-year carry-forward, even if you have nothing to set the loss against this year, because a future Indian capital gain could still rescue it. The capital loss set-off and carry-forward guide covers exactly how to keep it alive.

The closing read

The honest read is that, for the narrow window of 1 October 2024 to 31 March 2026, the buyback was a tax trap for NRIs, and the right default was almost always to sell on the exchange instead of tendering. Three facts drive that conclusion: a buyback in that window taxed your full proceeds as a dividend, not your gain; your cost was stranded as a capital loss that a passive NRI holder usually could not use; and a sale was taxed only on the gain at 12.5%, often less than half the buyback's cost, with no dead loss left behind. The exceptions were real but narrow: tender if the buyback premium over market was large enough to outweigh the heavier tax, or if you had other capital gains the stranded loss could absorb.

For decisions you are making now, the 1 April 2026 reversal changes the answer. Once buybacks are taxed as capital gains again, the trap is gone and the offer can be judged on its merits, with the payment date, not the announcement date, deciding which regime applies to you. And whichever route you take, the documentation discipline is the same and it is not optional: get your TRC and Form 10F to the company before the record date so the treaty rate (10% for UAE, 15% for UK and Canada, 25% for US individuals, not 15%) applies at source rather than the domestic 20% plus surcharge that you then spend a year clawing back. If your situation is a large buyback that straddles the April 2026 boundary, or one where the stranded loss is substantial, that is the point to pay a chartered accountant, not to rely on a blog, this one included.

Related guides

• Dividend tax for NRIs in India
• Capital gains tax for NRIs on shares and mutual funds
• TDS for NRIs and how to claim refunds
• DTAA relief for NRIs
• Capital loss set-off and carry-forward for NRIs
• ITR filing for NRIs: AY 2026-27 master guide
• Buying Indian stocks through the PIS route
• All Taxation guides
• All Investments guides

This guide is educational and general in nature. It is not individual tax advice. Buyback and dividend outcomes depend on your exact holdings, dates, residency and treaty, and the rules here changed on 1 October 2024 and again on 1 April 2026, so confirm your specific position with a qualified chartered accountant before you tender or sell.