s.46A — Capital gains on purchase by company of its own shares or other specified securities
Deems the difference between cost of acquisition and the consideration on a buy-back to be the shareholder's capital gains, with that consideration deemed nil on a buy-back of shares from 1 October 2024 to 31 March 2026. The loss that produces is tested on unquoted shares against section 50CA, on that section's own words, before it is treated as certain.
The main limb is long-standing and still computes the shareholder's position on a buy-back in any year governed by the Income-tax Act, 1961. What was added is a proviso, inserted before the Explanation by clause 18 of the Finance (No. 2) Act, 2024 with effect from 1 October 2024, deeming the value of consideration received by the shareholder to be nil. That proviso bites only where the consideration is of the nature referred to in section 2(22)(f) and the buy-back takes place on or after 1 October 2024, so the nil-consideration computation belongs to the window from that date to 31 March 2026, the counterpart deeming having no place in the Income-tax Act, 2025 once its own buy-back dividend limb was omitted. The counterpart is section 69 of the 2025 Act, whose sub-sections (2) and (3) were substituted by the Finance Act, 2026 to add a promoter-only additional income-tax.
Income-tax Act, 1961
s.46A
Income-tax Act, 2025
s.69
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 46A provides that where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by him, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received shall be deemed to be the capital gains arising to him in the year in which such shares or other specified securities were purchased by the company. The main limb fixes the year itself, and it is not the year of payment, of tender or of the board resolution. And the Explanation takes "specified securities" from the Explanation to section 77A of the Companies Act, 1956, a repealed statute, where the deemed dividend limb in section 2(22)(f) is keyed to section 68 of the Companies Act, 2013. The proviso inserted with effect from 1 October 2024 changed one input to zero, deeming the value of consideration nil where the shareholder receives consideration of the nature referred to in section 2(22)(f) on a buy-back of shares that takes place on or after that date. Nil less cost is a negative figure, and the section deems that figure to be the capital gains, so the computation yields a capital loss equal to the cost of acquisition and not a gain, however large the premium; on unquoted shares the substitution in section 50CA is tested on its own words before that loss is treated as certain, because section 46A is expressly subject to section 48. The deeming is confined to "for the purposes of this section", so the same payment is taxed gross as a dividend under another head in the same return. What the loss is worth depends on its character, fixed by the holding period under section 2(42A) read with section 2(29AA). Section 70(2) lets a short-term loss reach any capital gain of the year, section 70(3) confines a long-term loss to long-term capital gains, section 71(3) forbids setting it against income under any other head, and section 74 carries it forward for eight assessment years on the same asymmetry. For a tax year beginning on or after 1 April 2026 the computation runs under section 69 of the Income-tax Act, 2025, where the consideration is not deemed nil but where section 79 of that Act can substitute a prescribed fair market value for the consideration on a share other than a quoted share, for the purposes of section 72, a mechanism that is argued and not settled; the set-off machinery is sections 108, 109 and 111, and a promoter carries an additional income-tax under section 69(2).
What the provision does
Computes the shareholder's side of a buy-back and fixes the year of the computation. What it does not do is relieve the cost against the dividend. The deeming is for the purposes of this section only, so it does not reduce the receipt for section 2(22)(f), for section 56 or for withholding, and section 71(3) stops the loss it creates from reaching the dividend that arises on the same payment. It allows the cost of acquisition and nothing more, so interest paid after the shares were acquired does not enlarge the loss it produces, and on unquoted shares it does not close that loss either, the substitution in section 50CA falling to be tested on its own words before the loss is treated as certain. It supplies no holding-period rule of its own, the character of the loss coming from section 2(42A). On its words its proviso speaks only of a buy-back of shares, leaving other specified securities to the unamended main limb, though that reading is contested and the argument the other way is set out under section 2(22)(f). And it charges no tax and sets no rate.
Threshold questions
- What the cost of acquisition is, and when each share bought back was acquired
- Whether the buy-back took place on or after 1 October 2024, which decides whether the proviso deems the consideration nil
- Whether the consideration is of the nature referred to in section 2(22)(f), the only trigger the proviso has
- Whether what was bought back is a share or other specified securities, the proviso speaking only of a buy-back of shares
- What the holding period is under section 2(42A) read with section 2(29AA), because a long-term loss reaches only long-term capital gains
- Which year the company purchased the shares in, that being the year the main limb fixes for the computation
- Whether the year runs under section 69 of the Income-tax Act, 2025, where the consideration is not deemed nil but where section 79 can substitute a prescribed fair market value on a share other than a quoted share, and a promoter carries an additional income-tax
In practice
The recurring disputes.
Whether a shareholder who sold below cost in the section 115QA regime obtained a capital loss
Section 46A was not switched off for a buy-back before 1 October 2024, and on its main limb the consideration and the cost were both the actual figures, so a price below cost produced a loss. Against that, section 115QA(4) made the company's tax the final payment of tax in respect of that income, and section 115QA(5) allowed no deduction under any other provision "to the company or a shareholder in respect of the income which has been charged to tax under sub-section (1) or the tax thereon". For the Revenue, the receipt was taken out of the shareholder's charge altogether and the transaction was taxed once, at the company's end, with finality, so a shareholder cannot extract a loss from a transaction whose income was never his, and sub-section (5) names him expressly. For the assessee, sub-section (5) denies a deduction in respect of the income charged under sub-section (1), which is the company's distributed income, and a capital loss computed under this section is neither that income nor a deduction against it, while section 10(34A) exempted income arising and a loss is not income. It is genuinely undecided, and material only for pre-sunset years still under assessment or appeal, both provisions having been drafted for the ordinary case in which the price exceeded cost. The firm's view is that the loss is available, because what sub-section (5) bars is a deduction against the company's distributed income and a loss computed under this section is not that, and it is taken in the return with the ground stated because it will be met with the non-obstante opening and sub-section (4).
Whether section 94(8) can reach the loss the proviso manufactures
Section 94(8) applies where a person acquires securities within three months before a record date, is allotted additional securities without payment on the basis of that holding, and sells the original securities within nine months while retaining the bonus securities, the loss then being ignored and added to the cost of the bonus securities. For the Revenue this is the loss the provision exists to deny, it arises on a disposal of the original holding while the bonus shares are kept, and nothing in the sub-section confines it to a loss produced by a price differential. On the record date the Revenue's answer is that the date the sub-section is concerned with is the bonus record date and not the buy-back record date, because clause (a) looks to an acquisition within three months before the date on which the entitlement to the additional securities was fixed, and the tender into the buy-back is the sale or transfer in clause (c), which the sub-section nowhere requires to be a market sale, so the first ingredient is satisfied on the only facts on which the sub-section can bite at all. For the assessee two ingredients do not fit, because the record date in Explanation (aa) is a date of entitlement to dividend, income or additional securities without consideration while a buy-back record date is a date of entitlement to tender, and the sub-section operates on a loss arising "on account of such purchase and sale" whereas this loss arises from the deeming of consideration to nil and would be the same figure at any price. It is open, and live only where a bonus issue is in the picture. The firm's view is that the loss is not one arising on account of the purchase and sale, but the point is argued on both ingredients and not on the record date alone.
Whether the bar in section 71(3) carries into the inter-head provision of the 2025 Act
Section 71(3) of the 1961 Act is categorical, that a loss under "Capital gains" shall not be set off against income under any other head. In the Income-tax Act, 2025 the same-head provision is section 108 and the carry-forward provision is section 111, both reproducing the short-term and long-term asymmetry and the eight year limit, while the inter-head provision is section 109, as sections 110(1) and 112(1) of that Act each describe it. For the Revenue the 2025 Act is a recast and not a change of policy, sections 108 and 111 carry the old restrictions forward in substance, and a loss that could not cross heads in 1961 does not acquire that ability by renumbering. For the assessee, a provision that disables a set-off must be found in the words that disable it, sections 108 and 111 state their own restrictions expressly, and the cross-references in sections 110(1) and 112(1) show section 109 operating as the provision by which losses reach other heads. It is to be settled on the words of section 109 itself for tax year 2026-27 onwards, and the firm takes no position in advance of those words. What should not happen is carrying the section 71(3) proposition into a 2025 Act computation as though only the numbering had changed.
How a loss first computed under the 1961 Act is carried into years governed by the 2025 Act
A long-term buy-back loss first computed for assessment year 2025-26 has eight assessment years under section 74(2) in which to find long-term capital gains, and the later years in that window are governed by the Income-tax Act, 2025, whose section 111(2) allows no carry forward beyond eight tax years immediately succeeding "the tax year for which the loss was first computed". For the Revenue, section 111 operates on a loss computed under the head "Capital gains" for a tax year and measures its limit from the tax year for which the loss was first computed, so a loss computed for an assessment year under a different Act answers neither description exactly and the claim must rest on something other than section 111. For the assessee, sections 108 and 111 are the only set-off machinery available in a 2025 Act year, section 111(1)(a) does not identify the Act under which the loss was computed, and section 74(1) had already carried the loss forward before those years began. Section 111 does not answer it on its own words, and the question has not been decided. What the words settle is only that section 111(1)(a) does not identify the Act under which the loss was computed, so the answer turns on how the change of Act is bridged rather than on section 111, and no view is stated here on the outcome.