Buybacks, bonus shares and rights issues — how each is taxed for an NRI

These look similar — shares moving, money sometimes changing hands — but they sit under three different tax heads, and treating them the same is where mistakes start.

A buyback is the company purchasing its own shares back from you. A bonus issue is the company giving you extra shares free, out of its reserves, in proportion to what you hold. A rights issue is the company offering you the chance to buy more shares, usually at a discount, in proportion to your holding — which you can take up, partly take up, or renounce.

The rest of this page takes each in turn, because the buyback rule changed recently and the bonus and rights rules hinge on cost and holding period rather than on receipt.

This is the one where old guidance will mislead you, because the treatment has moved twice in two years. There are three periods to keep straight.

Until 30 September 2024: the company paid a buyback distribution tax and the proceeds were exempt in your hands. 1 October 2024 to 31 March 2026: the Finance (No. 2) Act 2024 moved the charge to the shareholder, and buyback proceeds in that window were taxed in your hands as a deemed dividend, with the cost of the tendered shares allowed as a capital loss. From 1 April 2026: under the Income-tax Act 2025, a buyback reverts to capital gains in your hands — the gain is your sale consideration minus the cost of the tendered shares, taxed at the listed-equity rate (long-term 12.5% over ₹1.25 lakh, short-term 20%).

Today a buyback is therefore a capital-gains event again. For an NRI, the company or registrar withholds TDS under Section 195 on the payout, which you reconcile against your actual gain on the return; where the treaty helps the position, you claim it with your Tax Residency Certificate and Form 10F (now Form 41 from FY 2026-27). The takeaway: check the date of the buyback against these three windows before you assume how it is taxed — a buyback now is capital gains, not a dividend and not tax-free.

When a company issues bonus shares, you receive additional shares for no payment. Nothing is taxed at the moment you receive them — the bonus issue itself is not income.

The tax shows up only when you sell. Two rules govern that sale. First, the cost of acquisition of bonus shares is nil — you paid nothing for them, so the entire sale price is the gain. Second, the holding period runs from the date the bonus shares were allotted, not from when you bought the original shares. So bonus shares sold within a year of allotment are short-term, even if your underlying holding is years old.

The practical effect is that bonus shares concentrate the gain (nil cost) and can reset the clock (holding period from allotment). When they do qualify as long-term listed equity, the gain still gets the ₹1.25 lakh exemption and the 12.5% rate under Section 112A like any other listed share — but you can't assume the original shares' long holding period carries over to them.

A rights issue gives you an entitlement to buy more shares, usually below market, in proportion to your holding. There are three ways it plays out, and each has a different tax result.

If you take up the rights and buy the shares, nothing is taxed at that point. The price you pay becomes the cost of those new shares, and their holding period runs from when they're allotted to you — so a later sale is an ordinary capital gain measured against what you paid.

If you renounce (sell) the rights entitlement itself to someone else rather than subscribing, the amount you receive for the entitlement is a capital gain — and because you got the entitlement for nothing, its cost is generally treated as nil. If you simply let the rights lapse without acting, there's no sale and no tax event, but you've given up value for nothing.

So the question to fix first is which of the three happened, because only the second — selling the entitlement — creates a taxable event at the rights stage; the others push the tax out to when you eventually sell the shares.

Meera is an NRI in Singapore holding Indian listed shares in a demat account. In one financial year three things happen across her holdings.

One company runs a tender buyback now and pays her ₹6,00,000 for the shares she tenders, which had originally cost her ₹4,50,000. Because the buyback falls on or after 1 April 2026, it is taxed in her hands as a capital gain — ₹1,50,000 (the ₹6,00,000 consideration less the ₹4,50,000 cost), at the listed-equity rate — with the company withholding TDS under Section 195 that she reconciles on her return. (Had the same buyback happened between October 2024 and March 2026, the whole ₹6,00,000 would instead have been a deemed dividend in her hands.)

A second company issues her bonus shares; she receives them free, reports nothing on receipt, and notes that their cost is nil and their holding period starts from the allotment date for whenever she sells. A third company runs a rights issue: she takes up part and renounces the rest, so the price she pays fixes the cost of the shares she subscribes, while the amount she receives for renouncing the balance is a separate capital gain that year. The figures are illustrative, but the mapping — buyback to capital gain, bonus to nil-cost shares, rights to take-up-or-renounce — is what her return has to capture.

If a buyback hit your demat between 1 October 2024 and 31 March 2026, the treatment was the awkward middle one, and it left a tail that can still be sitting on your return. In that window the whole amount the company paid you was taxed as a deemed dividend in your hands — not just the profit, the entire consideration — and the cost of the shares you tendered was not allowed against it.

Instead, that cost turned into a capital loss. The catch is what a capital loss can do: it can only be set off against capital gains, never against the dividend income from the same buyback, and if you have no capital gains to absorb it, it carries forward for up to eight years waiting for some. For an NRI who doesn't otherwise trade Indian shares, that loss can simply sit there unused — you paid full dividend tax on the gross amount and got no immediate benefit for what the shares cost you.

So if you had a buyback in those two years, two things are worth checking on the return that reported it: that the gross proceeds went in as dividend, and that the cost was captured as a carried-forward capital loss rather than quietly dropped. A loss that was never recorded can't be revived later when you finally do have a gain to set it against.

Section 94(8) blocks bonus stripping — buying just before the record date, collecting free shares, then selling the originals to book an artificial short-term loss. If you bought within three months before the record date and sell within nine months after it, the loss on the sale of the originals is disallowed and is instead added to the cost of your bonus shares (deferred, not lost).

For an NRI: a bonus on a long-held position is clean. Buying weeks before the record date and quickly selling the originals triggers this rule — the early loss won't land where you expect.

When you renounce a rights entitlement — sell it rather than subscribing — the cost is generally nil, so the full amount you receive is a capital gain (typically short-term, the right being fresh in your hands). Your original shares are untouched: they keep their own cost and holding period.

The buyer's cost for the shares they subscribe is what they paid you for the entitlement plus the issue price — so what you report as gain flows into their cost base.

If you take up the rights yourself, no tax arises at the rights stage: the issue price becomes the cost of your new shares. Renunciation is the only route that creates a taxable event before you eventually sell.

For a buyback in the deemed-dividend window (1 October 2024 – 31 March 2026), the income was a dividend, so the treaty's dividend article — not the capital-gains article — applied. India's domestic rate under Section 195 was 20% plus surcharge and cess; the dividend article of most treaties caps that at 10–15% on the gross amount. To get the lower rate at source you supplied a Tax Residency Certificate and Form 10F (now Form 41 from FY 2026-27 under the Income-tax Act 2025); where the company withheld at the higher domestic rate, the excess was reclaimed on the return.

For a buyback now (from 1 April 2026) this is moot — the income is a capital gain again, handled under the treaty's capital-gains article. The dividend-article point remains relevant only for buybacks that fell inside that 18-month window.