# Buyback of Shares by an Indian Subsidiary from a Foreign Parent (2026)

> Source: https://krystal7.com/insights/buyback-of-shares-indian-subsidiary-foreign-parent
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 18 Jan 2026; updated 24 Oct 2026
> Summary: From 1 Apr 2026 a buyback from a foreign parent is a capital gain taxed at up to 30 percent for promoters, with SH-9, SH-11 and FC-TRS filings.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- From 1 Apr 2026 a buyback is taxed as a capital gain in the shareholder's hands under section 69 of the Income Tax Act, 2025, after the Finance Act, 2026 omitted the deemed dividend clause.
- A foreign parent holding more than 10 percent of an unlisted Indian subsidiary is a promoter, so it pays an additional 17.5 percent on long term gains, about 30 percent in total.
- Section 68 of the Companies Act, 2013 caps a buyback at 25 percent of paid up capital and free reserves, needs a special resolution above 10 percent, and bars a new offer within one year.
- The company files the letter of offer in Form SH-8 and the solvency declaration in Form SH-9 before buying, extinguishes shares within seven days, and files Form SH-11 within 30 days.
- Under FEMA the buyback price paid to a non resident cannot exceed fair value, and the company reports the transfer in Form FC-TRS within 60 days.

**An Indian subsidiary can buy back shares from its foreign parent under section 68 of the Companies Act, 2013. The cap is 25 percent of paid up capital and free reserves. From 1 Apr 2026 the parent is taxed on the gain as a capital gain under section 69 of the Income Tax Act, 2025. A parent holding more than 10 percent is a promoter and pays about 30 percent on long term gains. The company files SH-8, SH-9, SH-11 and Form FC-TRS.**

This page covers the company law conditions, the filing sequence, and FEMA pricing and reporting. It also covers the three tax regimes for buybacks since 2024. It ends with a worked buyback by a US parent, treaty comparisons, common mistakes and a checklist.

## How does an Indian subsidiary buy back shares from its foreign parent?

The subsidiary follows section 68 of the Companies Act, 2013 and rule 17 of the Companies (Share Capital and Debentures) Rules, 2014. The board approves, members pass a special resolution if the buyback exceeds 10 percent, and the company files Forms SH-8 and SH-9. It then pays, extinguishes the shares, files Form SH-11 and reports the transfer in Form FC-TRS.

A buyback is the cleanest way to return invested capital to a foreign parent. A dividend can come only out of profits and free reserves. A buyback can also use the securities premium the parent paid when it subscribed. That makes it the usual route when a subsidiary holds surplus cash it raised as equity.

Three bodies of law apply at once. Company law sets the limits and the filings. FEMA sets the price ceiling and the reporting, because the seller is a person resident outside India. Income tax decides how much of the payment the parent keeps. Each one changed or was renumbered between October 2024 and April 2026, so older guides are often wrong on at least one of them.

For a wholly owned subsidiary, the "shareholders" are usually the parent and one nominee holding a single share. Section 68(5) requires a buyback from existing holders "on a proportionate basis" unless the company buys in the open market or from employee schemes. The nominee receives the offer too. In practice the nominee declines in writing, and the parent tenders its shares.

## What are the section 68 limits and conditions?

Section 68 allows a buyback only if the articles authorise it and the shares are fully paid. The total must stay within 25 percent of paid up capital and free reserves. Debt after the buyback cannot exceed twice paid up capital and free reserves. A buyback up to 10 percent needs only a board resolution at a meeting. Above that, members pass a special resolution.

The [text of section 68](https://www.incometaxindia.gov.in/w/section-68-98) sets these conditions in subsection (2). Explanation II says free reserves include the securities premium account for this section. So premium the parent paid on subscription counts toward the 25 percent base and can fund the buyback.

| Condition | Rule | Provision |
|---|---|---|
| Authority in the articles | Articles must permit a buyback | Section 68(2)(a) |
| Approval | Board resolution at a meeting if 10% or less of paid up equity capital plus free reserves; special resolution otherwise | Section 68(2)(b); section 179(3)(b) |
| Overall size | Not more than 25% of paid up capital plus free reserves | Section 68(2)(c) |
| Equity shares in one financial year | 25% measured against total paid up equity capital | Proviso to section 68(2)(c) |
| Debt after buyback | Secured and unsecured debt not more than 2 times paid up capital plus free reserves | Section 68(2)(d) |
| Shares | Fully paid up | Section 68(2)(e) |
| Gap between offers | No new offer within one year from the closure of the preceding offer | Proviso to section 68(2) |
| Completion | Within one year of the resolution | Section 68(4) |
| No fresh issue | No further issue of the same kind for six months after completion, except bonus and existing conversions | Section 68(8) |

The board power under section 179(3)(b) must be exercised at a board meeting, not by circular resolution. For a parent with directors abroad, that meeting can run by video conference.

Section 70 adds prohibitions. A company cannot buy back through a subsidiary or an investment company. It cannot buy back while in default on deposits, debentures, preference shares, dividends or term loans, until three years after the default ends. It also cannot buy back if it has not complied with sections 92, 123, 127 and 129. Those cover the annual return, dividends and financial statements. [Section 70](https://www.incometaxindia.gov.in/w/section-70-99) states both limbs.

We check one more point before the board meeting. Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with dematerialisation of securities by private companies that are not small companies. A subsidiary of a body corporate can never be a small company under section 2(85), so the rule reaches every foreign owned subsidiary. Read the current text of rule 9B on the MCA website before the board meeting. Then ask the depository participant to confirm the demat status of promoter, director and key managerial personnel holdings.

## Which funds can pay for a buyback?

Section 68(1) allows three sources: free reserves, the securities premium account, and the proceeds of an issue of shares or other specified securities. A company cannot buy back shares of one kind out of the proceeds of an earlier issue of the same kind. Rule 17(10) also bars using money borrowed from banks or financial institutions.

The rules shape how a subsidiary plans the cash. A subsidiary with surplus cash from operations funds the buyback from retained earnings. A subsidiary that raised more equity than it spent can also draw on securities premium. A subsidiary that wants to issue preference shares to fund an equity buyback can do so, because the kinds differ.

Section 69 of the Companies Act, 2013 then requires a transfer to the capital redemption reserve. Where the company buys back out of free reserves or securities premium, it transfers the nominal value of the shares bought back. The company can later use that reserve only to issue fully paid bonus shares. [Section 69](https://www.incometaxindia.gov.in/w/section-69-99) also requires disclosure of the transfer in the balance sheet.

Bank borrowing is the trap. A subsidiary that draws on a working capital line in the week of the buyback can breach rule 17(10). We ask the finance team to show the buyback payment coming from a separate account funded with surplus cash, before the offer opens.

## What does the company file, and in what order?

The company files the special resolution in Form MGT-14 within 30 days. Before buying, it files the letter of offer in Form SH-8 and the declaration of solvency in Form SH-9. After payment it extinguishes the shares within seven days and keeps the register in Form SH-10. It files the return in Form SH-11 within 30 days of completion.

Rule 17 sets the detailed sequence. The explanatory statement for the meeting must disclose the price, its basis, the funding source, the time limit and the promoter holdings. It must also carry an auditor's report on the permissible capital payment. That report relies on audited accounts not more than six months old at the date of the offer document, under rule 17(1)(n).

| Step | Form or record | Time limit | Provision |
|---|---|---|---|
| Board meeting approves buyback | Board minutes | Before the notice | Section 179(3)(b); rule 17(1) |
| Special resolution (if above 10%) | Form MGT-14 | Within 30 days of the resolution | Section 117 |
| Letter of offer | Form SH-8 | After the resolution, before the buyback | Rule 17(2) |
| Declaration of solvency | Form SH-9 | With the letter of offer | Section 68(6); rule 17(3) |
| Dispatch of letter of offer | Letter to shareholders | Not later than 20 days from filing SH-8 | Rule 17(4) |
| Offer period | Open offer | Not less than 15 days and not more than 30 days from dispatch; shorter if all members agree | Rule 17(5) and proviso |
| Verification of offers | Acceptance or rejection | Within 15 days of closure | Rule 17(7) |
| Funding | Special bank account | Immediately after closure | Rule 17(8) |
| Payment | Consideration in cash | Within 7 days of verification | Rule 17(9) |
| Extinguishment | Physical destruction or depository corporate action | Within 7 days of completion | Section 68(7) |
| Register of securities bought back | Form SH-10 | Kept at the registered office | Section 68(9); rule 17(12) |
| Return of buyback | Form SH-11, with the compliance certificate in Form SH-15 | Within 30 days of completion | Section 68(10); rule 17(13) and (14) |

Rule 17(14) requires a certificate in Form SH-15 annexed to the Form SH-11 return. Two directors sign it, including the managing director if any, and certify that the buyback complied with the Act and the rules. File each SH form in the version the MCA V3 portal shows on the filing date.

The proviso to rule 17(5) lets the offer stay open for less than 15 days where all members agree. In a subsidiary owned by a parent and one nominee, both can agree in writing, which shortens the timetable.

The six month rule on accounts catches many subsidiaries. A company with a 31 March year end that buys back in November or December cannot rely on its March accounts. We plan an interim audit to 30 September, so the auditor's report and the offer document rest on accounts that meet rule 17(1)(n).

Penalties are real. Section 68(11) punishes a default by the company with a fine of INR 1,00,000 to INR 3,00,000. Every officer in default faces the same fine range.

## How do directors abroad sign the declaration of solvency?

Section 68(6) requires the declaration to be signed by at least two directors, one of them the managing director if the company has one. It is verified by an affidavit. The directors state that the board made a full inquiry and that the company will not become insolvent within one year.

Rule 17(1)(m) requires the board to consider prospective and contingent liabilities, as if the company were being wound up. We prepare a cash flow forecast for 12 months after the buyback and table it at the board meeting. The forecast is the evidence that the opinion rests on reasonable grounds.

A director outside India usually swears the affidavit before a notary in that country. The registrar and the bank then expect the document to be apostilled or legalised, depending on the country. We send the affidavit draft to the overseas director at least two weeks before the SH-9 filing date. A missing apostille is the most common reason a buyback timetable slips.

## What FEMA pricing applies to a buyback from a non resident?

A buyback is a transfer of shares by a person resident outside India to the company, a person resident in India. Rule 9(2) of the Non Debt Instruments Rules permits it, subject to the pricing guidelines. Rule 21(2)(c) caps the price for an unlisted company at fair value, certified by a CA, merchant banker or cost accountant.

The [NDI Rules](https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083) do not mention buybacks by name. Section 2(ze) of FEMA defines "transfer" to include a sale, and the company buys the shares. So the general rule for a non resident selling to a resident applies. The price "shall not exceed" the valuation done under an internationally accepted pricing methodology on an arm's length basis.

Paragraph 8.11 of the [Master Direction on Foreign Investment](https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200) limits the age of the valuation certificate. It "must not be more than ninety days old as on the date of the investment". We apply the same window to a buyback, so the certificate date and the payment date sit inside 90 days.

Two other valuations run beside FEMA. [Section 79](https://www.incometaxindia.gov.in/w/section-79-115) of the Income Tax Act, 2025 covers a share that is not a quoted share. Where it is transferred below fair market value, that value becomes the consideration. On our reading, rule 57 of the Income Tax Rules, 2026 sets the value for unquoted equity shares by an adjusted net asset formula. Old rule 11UAA did that job for section 50CA.

The FEMA certificate is usually a discounted cash flow value. On our reading, the price should sit at or below the FEMA value and at or above the rule 57 value.

So three valuation questions sit on one price:

1. **FEMA fair value under rule 21.** The price paid to the non resident must not exceed it. A CA, SEBI registered merchant banker or practising cost accountant certifies it.
2. **Income tax fair market value under rule 57.** A price below it can be replaced by it under section 79. The company computes it from the balance sheet.
3. **Companies Act basis of price.** The explanatory statement must state how the board arrived at the price. The auditor's report supports it.

Where the discounted cash flow value falls below net asset value, the two tests clash. That happens in asset heavy subsidiaries with low forecast profits. We ask the valuer to reconcile both before the board fixes the price. Our guide to [FEMA pricing guidelines](/insights/fema-pricing-guidelines-share-valuation) covers the methods, and our [valuation reports service](/services/valuation-reports.html) issues the certificates.

## How is a buyback reported in Form FC-TRS?

The Indian company files Form FC-TRS on RBI's FIRMS portal through its AD bank. Regulation 4(3) of FEMA 395/2019-RB sets 60 days from the transfer or the remittance of funds, whichever is earlier. The onus sits on the resident party, which in a buyback is the company.

The [reporting regulations](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0) put the duty on the resident transferor or transferee. We attach the special resolution, the valuation certificate, the letter of offer, proof of remittance and the extinguishment record. The bank also wants the Form 145 acknowledgement for the tax on the remittance.

A late FC-TRS attracts a late submission fee under A.P. (DIR Series) Circular No. 16 of 30 Sep 2022. The fee follows a formula on the amount and the delay. Our guide to the [late submission fee](/insights/late-submission-fee-fema-reporting) explains it.

The buyback also changes the next Foreign Liabilities and Assets return. RBI's FAQ (updated 1 Jul 2026) gives 15 July as the due date. The return for the year of the buyback shows the reduced foreign equity.

## How is a buyback taxed in the parent's hands from 1 April 2026?

From 1 Apr 2026 the consideration is a capital gain. Section 69(1) of the Income Tax Act, 2025 deems the consideration less the cost of acquisition to be capital gains. The gain arises in the year of the buyback. The Finance Act, 2026 omitted the deemed dividend clause in section 2(40)(f) from the same date.

The [section 69 page](https://www.incometaxindia.gov.in/w/section-69-127) shows the amended text. A footnote records that Act No. 4 of 2026 substituted subsections (2) and (3) from 1 Apr 2026. The Finance Act, 2026 received assent on 30 Mar 2026. The [consolidated Act](https://www.incometaxindia.gov.in/documents/d/guest/income_tax_act_2025_as_amended_by_fa_act_2026-pdf) records clause (f) of section 2(40) as "Omitted by the Finance Act, 2026, w.e.f. 1-4-2026".

The base rates then follow the normal capital gains rules. A foreign parent holding unlisted shares for more than 24 months has a long term gain taxed at 12.5 percent under section 197. Section 197(4) computes that gain without the foreign currency method in section 72(6). A holding of 24 months or less gives a short term gain at the normal rate, 35 percent for a foreign company.

Section 69(2) then adds tax for promoters. The buyback must be under section 68 of the Companies Act, 2013. The promoter pays the normal tax plus an additional income tax on the gain.

| Promoter type | Additional tax on short term gain under section 196 | Additional tax on long term gain under section 197 or 198 | Total on long term gain before surcharge and cess |
|---|---|---|---|
| Domestic company | 2% | 9.5% | 22% (12.5% plus 9.5%) |
| Any other promoter, including a foreign company | 10% | 17.5% | 30% (12.5% plus 17.5%) |
| Not a promoter | Nil | Nil | 12.5% |

Source: section 69(2) of the Income Tax Act, 2025, as substituted by section 42 of the Finance Act, 2026.

The short term limb reaches only gains "referred to in section 196". [Section 196](https://www.incometaxindia.gov.in/w/section-196-78) covers equity shares sold with securities transaction tax, taxed at 20 percent. A buyback by an unlisted subsidiary carries no securities transaction tax. So, on our reading, a foreign parent selling back within 24 months pays the normal 35 percent with no additional tax. The long term limb does reach unlisted shares, because section 197 covers them.

For an unlisted company, section 69(3)(b) treats as a promoter anyone who holds, directly or indirectly, more than 10 percent of the shares. A foreign parent of a subsidiary is therefore a promoter. The Budget speech of 1 Feb 2026 (paragraph 138) tied the 30 percent rate to promoters that are not corporate bodies. The Act draws the line at domestic company instead. So a foreign company pays the 30 percent rate, not 22 percent.

Surcharge needs care. Section 3(6) of the [Finance Act, 2026](https://egazette.gov.in/WriteReadData/2026/271439.pdf) covers tax "charged and paid under section 69". It increases that tax by a surcharge of 12 percent, whatever the income. The Bill as introduced on 1 Feb 2026 did not name section 69 in this clause. The Act as passed does, so the Budget 2026 FAQ is silent on it.

We read section 3(6) as reaching the section 69(2) additional tax. The base tax under section 197 then carries the normal foreign company surcharge. That is 2 percent above INR 1 crore and 5 percent above INR 10 crore. A wider reading would apply 12 percent to the whole tax on the gain. We have not found a ruling or circular on the point. Health and education cess of 4 percent applies on top.

## What happened to buybacks between 1 October 2024 and 31 March 2026?

In that window a buyback was a deemed dividend under section 2(22)(f) of the Income Tax Act, 1961. The whole payment was taxed as dividend in the shareholder's hands, with no deduction for cost. The shareholder's cost became a capital loss, because section 46A treated the consideration as nil. The Finance (No. 2) Act, 2024 made this change.

The Budget speech of 23 Jul 2024 (paragraph 157) proposed "to tax income received on buy back of shares in the hands of the recipient". The [Memorandum to the Finance (No. 2) Bill, 2024](https://www.indiabudget.gov.in/budget2024-25/doc/memo.pdf) said the payment "shall be treated as dividend in the hands of shareholders". It applied to buybacks on or after 1 Oct 2024. The Finance (No. 2) Act, 2024 received assent on 16 Aug 2024.

For a foreign parent, section 115A of the 1961 Act taxed the dividend at 20 percent plus surcharge and cess. A lower treaty dividend rate could apply instead. The company withheld under section 195. The capital loss could be set off only against capital gains and carried forward, and only if the parent filed an Indian return.

Before 1 Oct 2024 the company itself paid the tax. Section 115QA levied 20 percent, plus 12 percent surcharge and 4 percent cess, on the distributed income. Distributed income was the buyback price less the amount the company received when it issued the shares. The shareholder was exempt under section 10(34A).

| Buyback completed | Who pays | Tax base | Rate for a foreign parent | Withholding |
|---|---|---|---|---|
| Before 1 Oct 2024 | Company | Price minus issue price | 23.296% (20% plus 12% surcharge plus 4% cess) | None on the parent |
| 1 Oct 2024 to 31 Mar 2026 | Parent | Whole payment as dividend; cost becomes a capital loss | 20% plus surcharge and cess, or treaty dividend rate | Section 195, 1961 Act |
| From 1 Apr 2026 | Parent | Gain (price minus cost) | 12.5% plus 17.5% for a non domestic promoter on long term gains, plus surcharge and cess | Section 393(2), serial 17 |

The 2025 Act as first enacted copied the deemed dividend rule into section 2(40)(f) and section 69(2). The Budget 2026 FAQ (Section XXXV) described that as the current law. The Finance Act, 2026 removed it from the day the 2025 Act started. So the deemed dividend rule never applied to a buyback under the new Act.

## Which DTAA rate applies to a buyback?

From 1 Apr 2026 a buyback falls under the capital gains article of the treaty, not the dividend article, on our reading. Most of India's treaties with common parent countries let India tax gains on shares of an Indian company. Mauritius and Singapore protect shares acquired before 1 Apr 2017. The Netherlands treaty protects holdings below 10 percent.

The change cuts both ways. A UK or German parent used to pay a 10 percent treaty dividend rate on the whole buyback price. It now pays domestic capital gains rates on the gain, because those treaties leave capital gains to domestic law. A Mauritius parent with shares bought before 1 Apr 2017 used to pay 5 percent on the whole payment. It now pays nothing in India on those shares under Article 13(4), on our reading.

| Parent country | Article for gains on Indian shares | India's right to tax a buyback gain | Treaty dividend rate that applied 1 Oct 2024 to 31 Mar 2026 |
|---|---|---|---|
| United States | 13 | Domestic law, no cap | 15% (10% voting stock) or 25% |
| United Kingdom | 14 | Domestic law, no cap | 10% |
| Germany | 13(4) | No cap | 10% |
| United Arab Emirates | 13(4) | No cap | 10% |
| Netherlands | 13(5) | Only if the holding is at least 10% and the buyer is an Indian resident; the company is one | 10% |
| Singapore | 13(4A), 13(4B) | Shares acquired before 1 Apr 2017: Singapore only, subject to Article 24A; later shares: India | 10% (25% holding) or 15% |
| Mauritius | 13(3A), 13(4) | Shares acquired before 1 Apr 2017: Mauritius only; later shares: India | 5% (10% holding) or 15% |

Sources: treaty texts and synthesised texts on incometaxindia.gov.in.

Where a treaty exempts the gain, we read the exemption as covering the section 69(2) additional tax too. The additional tax is income tax on the same capital gain, and the treaties cover Indian income tax including surcharge. The point is untested in the courts. We would support it with a Form 128 certificate before the buyback.

Each claim needs a Tax Residency Certificate and Form 41 under section 159(8). A treaty exemption also needs substance behind the parent. In Tiger Global (2026 INSC 60, 15 Jan 2026) the Supreme Court allowed the revenue's appeals on a Mauritius exit. It set aside the Delhi High Court judgment. Commentators read the ruling as limiting reliance on a TRC alone.

The Singapore synthesised text carries the MLI principal purpose test. Mauritius treaty benefits face the principal purpose test in new Article 27B from 13 Oct 2026, under S.O. 5611(E) of that date.

[CBDT Circular No. 01/2025](https://www.incometaxindia.gov.in/documents/d/guest/circular-1-2025-pdf) of 21 Jan 2025 says grandfathering under the Cyprus, Mauritius and Singapore treaties stays outside the principal purpose test. On our reading that covers Article 27B too, though the circular predates it. Our guides to the [India US DTAA](/insights/india-us-dtaa-for-companies) and the [India Mauritius DTAA](/insights/india-mauritius-dtaa-for-companies) cover the documents.

## How much tax does the subsidiary withhold, and which forms follow?

The subsidiary withholds under section 393(2), serial 17 of the Income Tax Act, 2025, at the rates in force on the sum chargeable. For a buyback that is the capital gain, not the whole payment. It deposits the tax by the 7th of the next month, files Form 144 for the quarter and issues Form 131 to the parent.

Serial 17 covers "any other sum chargeable" paid to a non resident or a foreign company. The [section 393 page](https://www.incometaxindia.gov.in/w/section-393-6) shows that any person paying must deduct. The company knows the parent's cost when the parent subscribed directly. Where the parent bought the shares from someone else, we ask for the purchase agreement and FC-TRS before computing the gain.

Does the rate for deduction include the section 69(2) additional tax? We found nothing in section 393 or in section 3 of the Finance Act, 2026 that says so. Section 3(6) speaks of tax "charged and paid", and section 3(7) sets surcharge on deductions without naming section 69.

So we withhold at the full promoter rate, base plus additional tax with surcharge and cess, unless the parent holds a certificate. Any excess comes back through the parent's return. Under deduction makes the company an assessee in default under section 398, with interest at 1 percent a month. A certificate in Form 128 under section 395(1) removes the doubt. Our guide to the [lower deduction certificate](/insights/lower-tds-certificate-non-residents-form-128) covers the application.

| Step | Form | Due date | Provision |
|---|---|---|---|
| Lower deduction certificate (optional) | Form 128 (old Form 13) | Before payment | Section 395(1) |
| Remittance information | Form 145 (old Form 15CA) | Before the bank remits | Rule 220, which lists the exempt payments |
| Accountant certificate | Form 146 (old Form 15CB) | Before Form 145 Part C | Rule 220 |
| Deposit of tax | Challan | 7th of the next month; 30 April for March | Rule 218(2) |
| Quarterly statement | Form 144 (old Form 27Q) | 31 Jan for October to December | Rule 219 |
| Certificate to the parent | Form 131 (old Form 16A) | Within 15 days of the Form 144 due date | Rule 215(1) |

The parent must file an Indian return for a capital gain, on our reading of section 207(8). That exemption covers dividends and similar items taxed at the section 207 rates, not capital gains. Our guide to [Forms 145 and 146](/insights/form-15ca-and-15cb-requirements-guide-2026) covers the remittance filings.

## Is a buyback better than a dividend or a capital reduction?

A buyback suits returning capital the parent put in, including premium. A dividend suits distributing profit and often costs less where the treaty dividend rate is 10 percent. A capital reduction under section 66 needs tribunal approval and is a deemed dividend to the extent of accumulated profits. The answer depends on the parent's cost and treaty.

The three routes compare as follows:

1. **Dividend.** Section 123 allows it out of profits and free reserves, not premium. A foreign parent pays 20 percent under section 207 plus surcharge and cess, or the treaty rate. FEMA treats it as a current account remittance with no approval.
2. **Buyback.** Section 68 allows it out of free reserves, securities premium or the proceeds of another issue. The parent pays capital gains tax, about 30 percent on long term gains for a promoter. FEMA caps the price at fair value and needs Form FC-TRS.
3. **Capital reduction.** Section 66 needs a special resolution and confirmation by the tribunal. Section 2(40)(d) of the Income Tax Act, 2025 treats the payout as a dividend to the extent of accumulated profits. The rest is a capital gain. On our reading FC-TRS and pricing apply too.

The tax result turns on the gap between price and cost. A parent that subscribed at a high premium and sells back near that price has a small gain. Its buyback tax is small even at 30 percent. A parent that subscribed at face value and sells back at a high value has a large gain. A dividend under a 10 percent treaty can cost it far less. Our guide to [repatriation of profits](/insights/repatriation-of-profits-from-india-to-a-foreign-parent-the-2026-strategic-guide) compares the routes over several years, and our [dividend guide](/insights/dividend-from-indian-subsidiary-to-foreign-parent) covers the dividend side.

## What has happened since 18 January 2026?

This page carries a publish date of 18 Jan 2026. On that date the deemed dividend rule of the 1961 Act still governed buybacks. Four events since then changed the answer. The text above states the law as on 23 Oct 2026.

1. **1 Feb 2026.** The Budget speech (paragraph 138) proposed taxing buybacks "for all types of shareholders as Capital Gains". Promoters would pay an additional tax.
2. **30 Mar 2026.** The Finance Act, 2026 (Act No. 4 of 2026) received assent.
3. **1 Apr 2026.** The Income Tax Act, 2025 came into force. Section 2(40)(f) was omitted and section 69(2) and (3) substituted from the same date.
4. **13 Oct 2026.** India notified a protocol to the Mauritius treaty by S.O. 5611(E). It substitutes the preamble and adds a principal purpose test in Article 27B from that date.

A buyback completed between 1 Oct 2024 and 31 Mar 2026 stays under the 1961 Act rules. Its tax, withholding and capital loss follow the deemed dividend regime, even if the parent files the return after 1 Apr 2026.

## What changed in 2026

| Old rule | New rule | Date | Instrument |
|---|---|---|---|
| Buyback payment is a deemed dividend, section 2(22)(f) of the 1961 Act | Clause (f) of section 2(40) omitted; buyback is a capital gain | 1 Apr 2026 | Finance Act, 2026 |
| Consideration deemed nil, cost becomes a capital loss, section 46A | Gain is price minus cost, section 69(1) | 1 Apr 2026 | Income Tax Act, 2025; Finance Act, 2026 |
| No extra tax for promoters | Additional tax of 9.5% or 17.5% on long term gains, 2% or 10% on short term gains under section 196, section 69(2) | 1 Apr 2026 | Finance Act, 2026, section 42 |
| Deemed dividend carried the shareholder's normal surcharge | Surcharge of 12% on tax charged under section 69, whatever the income | 1 Apr 2026 | Finance Act, 2026, section 3(6) |
| Withholding under section 195 at 20% plus surcharge and cess, or treaty dividend rate | Withholding under section 393(2), serial 17, on the gain | 1 Apr 2026 | Income Tax Act, 2025 |
| Forms 15CA, 15CB, 13, 27Q, 16A | Forms 145, 146, 128, 144, 131 | 1 Apr 2026 | Income Tax Rules, 2026 |
| Fair market value under rule 11UA | Rule 57 | 1 Apr 2026 | Income Tax Rules, 2026 |
| Mauritius treaty without a principal purpose test | Article 27B added | 13 Oct 2026 | S.O. 5611(E) |

Section 68 of the Companies Act, 2013 did not change in 2026. The Corporate Laws (Amendment) Bill, 2026 was introduced on 23 Mar 2026 and sits with a Joint Committee. It is not law, so we have not treated any proposal in it as a rule here.

## Worked example

A US company owns all but one share of an Indian Private Limited company. It subscribed for 1,00,00,000 equity shares of INR 10 each at INR 25 per share in 2019. The subsidiary has surplus cash and plans a buyback in December 2026. The figures are illustrative.

**Step 1: the section 68 limits.** The interim audited balance sheet at 30 Sep 2026 shows paid up capital of INR 10,00,00,000. Securities premium is INR 15,00,00,000 and retained earnings are INR 20,00,00,000. The tests then run as follows.

1. The base for section 68 is INR 45,00,00,000, the sum of capital, premium and retained earnings.
2. The 25 percent overall limit is INR 11,25,00,000. The proposed buyback of 20,00,000 shares at INR 45 is INR 9,00,00,000, inside it.
3. The 10 percent board only limit is INR 4,50,00,000. The buyback exceeds it, so members pass a special resolution.
4. The equity limit for the year is 25 percent of paid up equity capital, INR 2,50,00,000 in nominal value. The buyback is INR 2,00,00,000 in nominal value.
5. After the buyback, capital is INR 8 crore, premium INR 8 crore and retained earnings INR 18 crore, a total of INR 34 crore. Debt of INR 6 crore gives a ratio of 0.18 to 1, within 2 to 1.

The premium on buyback of INR 7,00,00,000 comes out of securities premium. The company transfers INR 2,00,00,000, the nominal value, from retained earnings to the capital redemption reserve.

**Step 2: the price.** A Chartered Accountant certifies FEMA fair value at INR 48 per share on 2 Nov 2026, by discounted cash flow. The rule 57 value is INR 45, which is net assets of INR 45 crore over 1 crore shares. The board fixes the price at INR 45. It is below the FEMA ceiling of INR 48 and equal to the rule 57 value.

**Step 3: the tax.** The parent's cost is INR 25 per share and it has held the shares since 2019.

| Item | Working | INR |
|---|---|---|
| Consideration | 20,00,000 × 45 | 9,00,00,000 |
| Cost of acquisition | 20,00,000 × 25 | 5,00,00,000 |
| Long term capital gain | 9,00,00,000 minus 5,00,00,000 | 4,00,00,000 |
| Base tax at 12.5%, section 197 | 12.5% of 4,00,00,000 | 50,00,000 |
| Surcharge at 2% on base tax | Income above INR 1 crore, not above INR 10 crore | 1,00,000 |
| Additional tax at 17.5%, section 69(2) | 17.5% of 4,00,00,000 | 70,00,000 |
| Surcharge at 12% on additional tax | 12% of 70,00,000 | 8,40,000 |
| Tax plus surcharge | Sum of the four lines above | 1,29,40,000 |
| Cess at 4% | 4% of 1,29,40,000 | 5,17,600 |
| Total tax withheld | | 1,34,57,600 |
| Effective rate on the gain | 1,34,57,600 ÷ 4,00,00,000 | 33.64% |
| Net remitted to the parent | 9,00,00,000 minus 1,34,57,600 | 7,65,42,400 |

The US treaty leaves capital gains to domestic law under Article 13, so no treaty relief applies. On the wider reading of section 3(6), the 12 percent surcharge would apply to the whole INR 1,20,00,000. The total would then be INR 1,39,77,600.

**Step 4: the comparison.** The same INR 9 crore buyback, completed on 15 Jan 2026 in the deemed dividend window, would have been a dividend. The US treaty rate of 15 percent gives INR 1,35,00,000. The parent would also hold a capital loss of INR 5 crore usable only against future Indian capital gains. Before 1 Oct 2024 the company would have paid 23.296 percent on INR 4 crore, which is INR 93,18,400.

**Step 5: the timetable.** The dates below assume no delay.

1. Board meeting on 2 Nov 2026 approves the buyback and calls an extraordinary general meeting at shorter notice under the section 101(1) proviso.
2. Members pass the special resolution on 9 Nov 2026. Form MGT-14 is due by 9 Dec 2026.
3. The company files Forms SH-8 and SH-9 on 11 Nov 2026 and dispatches the letter of offer on 12 Nov 2026.
4. The offer runs 15 days, from 12 Nov to 27 Nov 2026.
5. The company verifies the tender by 12 Dec 2026 and pays by 19 Dec 2026, after Forms 145 and 146.
6. It extinguishes the shares by 26 Dec 2026 and files Form SH-11 by 18 Jan 2027.
7. It deposits the tax by 7 Jan 2027 and files Form 144 by 31 Jan 2027.
8. It files Form FC-TRS within 60 days of the 19 Dec 2026 remittance, by 17 Feb 2027.

**Same gain, other parents.** Apply the same INR 4 crore long term gain to parents in other countries, with a 100 percent holding. The first figure is the Indian tax on the buyback now. The second is the treaty dividend tax the INR 9 crore payment would have borne between 1 Oct 2024 and 31 Mar 2026.

1. **UK company, shares acquired in 2019.** Article 14 leaves the gain to domestic law. Tax is INR 1,34,57,600 now, against INR 90,00,000 at 10 percent before.
2. **Dutch company, shares acquired in 2019.** Article 13(5) lets India tax a holding above 10 percent sold to an Indian resident. Tax is INR 1,34,57,600 now, against INR 90,00,000 before.
3. **Singapore company, shares acquired in 2015, passing Article 24A.** Article 13(4A) gives Singapore the sole right. Indian tax is nil now on our reading, against INR 90,00,000 before.
4. **Mauritius company, shares acquired in 2015.** Article 13(4) gives Mauritius the sole right. Indian tax is nil now on our reading, against INR 45,00,000 at 5 percent before. After Tiger Global, expect the revenue to test the parent's substance before it accepts the claim.

## Common mistakes

1. **Using bank money for the buyback.** Rule 17(10) bars money borrowed from banks or financial institutions. Fix: fund the special account from surplus cash and keep the bank statements.
2. **Relying on stale accounts.** The auditor's report needs accounts not more than six months old. Fix: plan an interim audit for a buyback more than six months after the year end.
3. **Pricing above FEMA fair value.** Rule 21 caps the price a non resident receives. Fix: obtain the valuation certificate within 90 days of payment and price at or below it.
4. **Ignoring the rule 57 value.** A price below the income tax fair market value invites section 79. Fix: reconcile the FEMA and rule 57 values before the board fixes the price.
5. **Applying the 22 percent rate to a foreign parent.** The lower rate is for domestic company promoters only. Fix: use the 17.5 percent additional tax for any foreign company holding more than 10 percent.
6. **Withholding on the treaty dividend rate.** From 1 Apr 2026 a buyback is a capital gain, not a dividend. Fix: apply the capital gains article and the section 197 rate, or obtain a Form 128 certificate.
7. **Missing Form FC-TRS.** The company, as the resident buyer, files it. Fix: diarise 60 days from the earlier of the transfer and the remittance.
8. **A second buyback within a year.** Section 68(2) bars an offer within one year from the closure of the last one. Fix: size the first buyback for the full year's need.
9. **Issuing shares too soon after the buyback.** Section 68(8) bars a further issue of the same kind for six months. Fix: schedule any rights issue or private placement after the six months.
10. **Leaving the nominee's position open.** Section 68(5) needs a proportionate offer. Fix: obtain the nominee's written decision not to tender before the offer closes.

For the corporate filings, see our [FEMA compliance service](/services/fema-compliances.html).

## Checklist

1. Confirm that the articles authorise a buyback, and amend them first if they do not.
2. Check the section 70 prohibitions, including defaults and filings under sections 92, 123, 127 and 129.
3. Confirm the demat position of promoter, director and key managerial personnel holdings under rule 9B.
4. Compute the 25 percent and 10 percent limits on paid up capital and free reserves.
5. Test the debt ratio after the buyback against 2 to 1.
6. Obtain audited accounts not more than six months old and the auditor's report under rule 17(1)(n).
7. Obtain a FEMA fair value certificate dated within 90 days of the planned payment.
8. Compute the rule 57 value and reconcile it with the FEMA value.
9. Hold the board meeting and, above 10 percent, the general meeting for the special resolution.
10. File Form MGT-14 within 30 days of the special resolution.
11. File Form SH-8 with the declaration of solvency in Form SH-9.
12. Dispatch the letter of offer within 20 days and keep it open for 15 to 30 days.
13. Compute the parent's gain and the promoter tax, and apply for Form 128 if a treaty exemption applies.
14. File Forms 145 and 146, withhold tax and pay within seven days of verification.
15. Extinguish the shares within seven days of completion and update Form SH-10.
16. Transfer the nominal value to the capital redemption reserve.
17. File Form SH-11 within 30 days of completion.
18. File Form FC-TRS within 60 days of the transfer or remittance, whichever is earlier.
19. Deposit the tax by the 7th of the next month, file Form 144 and issue Form 131.

## Key terms

- **Buyback of shares**: A buyback is a company purchasing its own shares under section 68 of the Companies Act, 2013, capped at 25 percent of paid up capital and free reserves. From 1 Apr 2026 the shareholder is taxed on the capital gain, not a deemed dividend, and a promoter bears extra tax under section 69 of the Income Tax Act, 2025. (https://krystal7.com/glossary#buyback-of-shares)
- **Declaration of solvency (Form SH-9)**: An affidavit filed with the Registrar of Companies before a buyback under section 68(6) of the Companies Act, 2013. At least two directors, including the managing director if any, declare that the company can meet its liabilities and will not become insolvent within one year. (https://krystal7.com/glossary#declaration-of-solvency-form-sh-9)
- **Capital redemption reserve (CRR)**: A reserve that section 69 of the Companies Act, 2013 requires when a company buys back shares out of free reserves or securities premium. The company transfers a sum equal to the nominal value of the shares bought back. Section 69(2) lets the company apply it to pay up fully paid bonus shares. (https://krystal7.com/glossary#capital-redemption-reserve)
- **Promoter (buyback tax)**: For an unlisted company, section 69(3) of the Income Tax Act, 2025 treats as a promoter anyone who is a promoter under section 2(69) of the Companies Act, 2013 or holds, directly or indirectly, more than 10 percent of the shares. Promoters pay additional tax on buyback gains. (https://krystal7.com/glossary#promoter-buyback-tax)
- **Form FC-TRS**: The report on the FIRMS portal of a transfer of equity instruments between a resident and a person resident outside India. The resident party files it through its AD bank within 60 days of the transfer or of receiving the funds, whichever is earlier, under regulation 4(3) of FEMA 395/2019-RB. Deferred consideration needs a filing on every tranche. (https://krystal7.com/glossary#form-fc-trs)
- **Pricing guidelines (FEMA)**: Rule 21 of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 sets the price floor and ceiling for unlisted shares. A resident selling to a non resident must receive at least fair value. A non resident selling to a resident may receive at most fair value, certified by a Chartered Accountant, SEBI registered merchant banker or practising cost accountant. (https://krystal7.com/glossary#pricing-guidelines)
- **Double Taxation Avoidance Agreement (DTAA)**: A treaty between India and another country that divides taxing rights over cross border income and caps Indian withholding tax. Section 159 of the Income Tax Act, 2025 (old section 90) gives treaties effect. Where India has no comprehensive DTAA with a country, domestic withholding rates under the Income Tax Act, 2025 apply and no treaty documents are needed. (https://krystal7.com/glossary#double-taxation-avoidance-agreement)

## Frequently Asked Questions

### Can an Indian subsidiary buy back shares from its foreign parent without RBI approval?

Yes. Rule 9(2) of the Non Debt Instruments Rules lets a non resident sell shares to a resident, which includes the company in a buyback. The price must not exceed fair value under rule 21. The company reports the transfer in Form FC-TRS within 60 days through its AD bank.

### How is a buyback taxed for a foreign parent from 1 April 2026?

The parent pays capital gains tax on the buyback price less its cost, under section 69(1) of the Income Tax Act, 2025. A parent holding more than 10 percent is a promoter. It pays an additional 17.5 percent on long term gains, about 30 percent in total before surcharge and cess.

### Is a buyback still a deemed dividend?

No, not from 1 Apr 2026. The Finance Act, 2026 omitted clause (f) of section 2(40) of the Income Tax Act, 2025 from that date. Buybacks completed between 1 Oct 2024 and 31 Mar 2026 remain deemed dividends under section 2(22)(f) of the Income Tax Act, 1961.

### What is the maximum size of a buyback?

Section 68(2)(c) of the Companies Act, 2013 caps it at 25 percent of paid up capital and free reserves, which include securities premium. For equity shares, the 25 percent in a financial year is measured against total paid up equity capital. Debt after the buyback cannot exceed twice capital and free reserves.

### When is a special resolution needed for a buyback?

A special resolution is needed when the buyback exceeds 10 percent of total paid up equity capital and free reserves. Up to that level, a board resolution at a board meeting is enough under section 68(2)(b). The special resolution is filed in Form MGT-14 within 30 days under section 117.

### How long must a company wait between two buybacks?

One year. The proviso to section 68(2) of the Companies Act, 2013 bars a new offer within one year from the closure of the preceding offer. Separately, section 68(8) bars a further issue of the same kind of shares for six months after completion.

### What are Forms SH-8, SH-9 and SH-11?

Form SH-8 is the letter of offer and Form SH-9 the declaration of solvency. Both go to the Registrar before the buyback under rule 17. Form SH-11 is the return of buyback, filed within 30 days of completion under section 68(10). Form SH-10 is the register of securities bought back.

### When must bought back shares be extinguished?

Within seven days of the last date of completion of the buyback, under section 68(7) of the Companies Act, 2013. Physical certificates are destroyed. Demat shares are extinguished through a corporate action with the depository. The company records the date in the register in Form SH-10.

### Does a foreign company parent pay the 22 percent or the 30 percent rate?

The 30 percent rate. Section 69(2) of the Income Tax Act, 2025 gives the lower additional tax only to a promoter that is a domestic company. A foreign company falls in the other category. It pays 17.5 percent on top of the 12.5 percent long term rate, before surcharge and cess.

### Who files Form FC-TRS on a buyback?

The Indian company files it, as the resident buyer. Regulation 4(3) of FEMA 395/2019-RB puts the onus on the resident party. The filing is due within 60 days of the transfer or the remittance, whichever is earlier, on RBI's FIRMS portal through the AD bank.

### Can a treaty remove Indian tax on a buyback?

Sometimes. From 1 Apr 2026 the capital gains article applies, on our reading. Mauritius and Singapore parents can claim exemption for shares acquired before 1 Apr 2017, under Articles 13(4) and 13(4A). Singapore parents must also pass Article 24A. US, UK, German and UAE parents cannot, because those treaties leave the gain taxable in India.

### Does the company deduct tax on the whole buyback payment?

No, only on the sum chargeable. From 1 Apr 2026 that is the capital gain, under section 393(2), serial 17 of the Income Tax Act, 2025. The company needs the parent's cost evidence to compute it. A Form 128 certificate under section 395(1) can fix a lower or nil rate.

### Can securities premium be returned to the parent through a buyback?

Yes. Section 68(1) allows a buyback out of the securities premium account, and Explanation II counts premium as free reserves. A dividend cannot use premium, because section 123 allows dividends only from profits and free reserves. A buyback is therefore the usual route to return premium.

### Does the parent need to file an Indian income tax return after a buyback?

Yes, on our reading. Section 207(8) of the Income Tax Act, 2025 excuses a foreign company only where its income is dividends and similar section 207 items. A capital gain is outside that list. The parent files a return to report the gain and claim the Form 131 credit.

## Sources

- Income Tax Department, Income Tax Act, 2025, section 69, as amended by Act No. 4 of 2026 from 1 Apr 2026, https://www.incometaxindia.gov.in/w/section-69-127
- Income Tax Department, Finance Act, 2026, section 42 (amendment of section 69), https://www.incometaxindia.gov.in/w/section-42-164
- Ministry of Law and Justice, The Finance Act, 2026 (No. 4 of 2026), assent 30 Mar 2026, section 3(6) and 3(7), Gazette of India Extraordinary CG-DL-E-31032026-271439, https://egazette.gov.in/WriteReadData/2026/271439.pdf
- Gazette of India, The Finance Bill, 2026 (Bill No. 3 of 2026) as introduced on 1 Feb 2026, clause 3(6), https://egazette.gov.in/WriteReadData/2026/269757.pdf
- Income Tax Department, Income Tax Act, 2025, section 196, https://www.incometaxindia.gov.in/w/section-196-78
- Income Tax Department, Income Tax Act, 2025, section 79, https://www.incometaxindia.gov.in/w/section-79-115
- Income Tax Department, Income Tax Act, 2025 as amended by the Finance Act, 2026 (section 2(40)), https://www.incometaxindia.gov.in/documents/d/guest/income_tax_act_2025_as_amended_by_fa_act_2026-pdf
- Income Tax Department, FAQs on Budget 2026, Section XXXV, Buyback of Shares, https://www.incometaxindia.gov.in/documents/20117/15766092/FAQs-Budget-2026+Updated.pdf/daf54d14-aca9-c4ea-b786-598fd2f8d4c4?t=1771846962606
- Ministry of Finance, Budget Speech 2026-27, 1 Feb 2026, paragraph 138, https://www.indiabudget.gov.in/doc/budget_speech.pdf
- Ministry of Finance, Budget Speech 2024-25, 23 Jul 2024, paragraph 157, https://www.indiabudget.gov.in/budget2024-25/doc/budget_speech.pdf
- Ministry of Finance, Memorandum explaining the provisions in the Finance (No. 2) Bill, 2024, https://www.indiabudget.gov.in/budget2024-25/doc/memo.pdf
- Income Tax Department, Income Tax Act, 2025, section 197, https://www.incometaxindia.gov.in/w/section-197-78
- Income Tax Department, Income Tax Act, 2025, section 72, https://www.incometaxindia.gov.in/w/section-72-127
- Income Tax Department, Income Tax Act, 2025, section 393, https://www.incometaxindia.gov.in/w/section-393-6
- Income Tax Department (Companies Act text), Companies Act, 2013, section 68, https://www.incometaxindia.gov.in/w/section-68-98
- Income Tax Department (Companies Act text), Companies Act, 2013, section 69, https://www.incometaxindia.gov.in/w/section-69-99
- Income Tax Department (Companies Act text), Companies Act, 2013, section 70, https://www.incometaxindia.gov.in/w/section-70-99
- Ministry of Corporate Affairs, Companies (Share Capital and Debentures) Rules, 2014, rule 17, https://www.mca.gov.in
- Reserve Bank of India, Foreign Exchange Management (Non Debt Instruments) Rules, 2019, updated up to 2 Sep 2026, https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083
- Reserve Bank of India, Master Direction on Foreign Investment in India, updated up to 15 Jun 2026, https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200
- Reserve Bank of India, Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0
- Income Tax Department, India Netherlands DTAA, synthesised text, Article 13, https://www.incometaxindia.gov.in/w/netherlands-synthesised-text-1
- Income Tax Department, India Singapore DTAA, synthesised text, Articles 13 and 24A, https://www.incometaxindia.gov.in/w/singapore-synthesised-text-1
- Income Tax Department, India Mauritius DTAA, Article 13 and S.O. 5611(E) of 13 Oct 2026 (preamble and Article 27B), https://www.incometaxindia.gov.in/w/mauritius-comprehensive-agreements-1
- Income Tax Department, India UAE DTAA, synthesised text, Articles 10 and 13, https://www.incometaxindia.gov.in/w/uae-synthesised-text-1
- Income Tax Department, India Germany DTAA, Articles 10 and 13, https://www.incometaxindia.gov.in/w/germany-comprehensive-agreements-1
- CBDT, Circular No. 01/2025, 21 Jan 2025, guidance on the principal purpose test, https://www.incometaxindia.gov.in/documents/d/guest/circular-1-2025-pdf
- Supreme Court of India, Authority for Advance Rulings (Income Tax) v Tiger Global International II Holdings, 2026 INSC 60, 15 Jan 2026, https://api.sci.gov.in/supremecourt/2025/1251/1251_2025_7_1501_67552_Judgement_15-Jan-2026.pdf

---
Krystal7 Consultants, business@krystal7.com, +91 94657 30130. HTML version: https://krystal7.com/insights/buyback-of-shares-indian-subsidiary-foreign-parent