पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 28 · Scale

Taxes at exit: capital gains, buybacks and what founders keep

A share sale, a secondary and a buyback can return the same rupees and leave very different amounts behind. Model the tax on each, the holding period that changes the rate, and the treaty questions that follow.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

A dim stone corridor of arches leading towards a gated opening and daylight. — Photograph: Ольга Сидорина · Pexels

Two founders each receive ₹20 crore for shares that cost them ₹50 lakh. One sells to an incoming investor three years after allotment and pays about ₹2.4 crore of tax before surcharge and cess. The other has the company buy the shares back and, under the rate proposed for promoters in the February 2026 Budget, would pay about ₹5.9 crore. Same company, same money, different route. The route is a decision the founder can still make.

This lesson sets out how a resident founder’s exit is taxed in India: a sale of shares to a buyer, a secondary to an investor, and a buyback by the company. It covers the holding period that changes the rate, the valuation floor on unlisted shares, the reinvestment exemption, and the treaty questions for founders and investors outside India. The Income-tax Act 2025 replaced the 1961 Act on 1 April 2026 without, in the Board’s words, altering the underlying tax policy, so the mechanics below hold; section numbers have changed, and where the new number has not been confirmed the old one is given as a pointer. Rates were read on 11 October 2026.

A share sale: the gain, the clock and the rate

The capital gain is the full value of the consideration less the cost of acquisition. For a founder who subscribed at face value the cost is close to nothing; for shares acquired through options it is the fair market value at exercise, which was already taxed as salary, as the [ESOP lesson](/library/esop-taxation-in-india-two-taxing-events) explains. The holding period runs from allotment. Since 23 July 2024, as the Finance (No. 2) Bill 2024 memorandum sets out, there are two: twelve months for listed securities and twenty-four months for everything else, which includes shares of a private company. Long-term gains are taxed at 12.5 per cent across asset classes without indexation. Short-term gains on listed shares that paid securities transaction tax are taxed at 20 per cent, and the first ₹1.25 lakh of long-term gains on listed equity in a year is exempt. Short-term gains on unlisted shares carry no special rate and are taxed at the founder’s slab rate.

Two additions matter for large gains. The memorandum to the Finance Bill 2026 caps the surcharge on dividend income and capital gains under sections 196, 197 and 198 of the 2025 Act, the successors of sections 111A, 112 and 112A, at 15 per cent, and a 4 per cent health and education cess applies on top. And a sale at less than fair value does not reduce the tax: under the rule that was section 50CA of the 1961 Act, where the consideration for an unquoted share is less than its fair market value determined as prescribed, that value is deemed to be the consideration. A founder who sells cheaply to a friend, or at a deep discount in a secondary, is taxed on the value, not the price.

Run the opening example. Proceeds of ₹20 crore less a cost of ₹50 lakh is a gain of ₹19.5 crore. Held thirty-six months, it is long-term: 12.5 per cent is ₹2.44 crore, before surcharge and cess. Had the buyer arrived at month twenty, the same gain would have been short-term at a 30 per cent slab, ₹5.85 crore. Four months of patience can be worth more than any negotiation over price.

A secondary: a sale with a price question

A secondary, in which a founder sells part of a holding to a new or existing investor during a round, is taxed exactly as a sale: the same gain, the same holding periods, the same rates. Two features make it different in practice. The price is usually at a discount to the primary round, sometimes a large one, and the deemed-value rule above means the founder is taxed on fair market value if the discounted price falls below it; get the valuation report before agreeing the discount, not after. And the founder usually sells only part of a holding built up over several allotments, so ask the accountant which lots the law treats as sold and when each one turns long-term, before fixing the closing date. The mechanics of approvals and pricing are in the [secondaries lesson](/library/secondaries-founder-and-employee-liquidity).

Hands working a calculator over printed financial papers. — Run the numbers before agreeing the discount. Below fair value the price stops deciding the tax. Photograph: Kindel Media · Pexels

A buyback: the rules changed twice

From 1 October 2024, under the 2024 memorandum, a buyback by a domestic company became income in the shareholder’s hands and changed its character: the whole buyback payment was treated as a dividend, taxed at the slab rate, and the cost of the shares became a capital loss to carry forward against future gains. For a founder at the top slab with a near-zero cost, that was a 30 per cent tax on the whole payment and a capital loss of little use.

The Budget Speech of 1 February 2026, at paragraph 138, proposed to tax buybacks as capital gains for all types of shareholders, with promoters paying an additional buyback tax that makes the effective rate 22 per cent for corporate promoters and 30 per cent for non-corporate promoters. For an investor who is not a promoter, a buyback then looks like a sale. For a founder who is a promoter, it costs more than a long-term sale at 12.5 per cent. Confirm with your chartered accountant how the Finance Act 2026 enacted the proposal, from which date, and how it defines a promoter for an unlisted company, before agreeing a buyback price; a founder who expects to be classed as a promoter should usually prefer a sale or secondary to an incoming investor at the same price.

Modelling the three routes

The figure works one founder through the routes. Start with the opening numbers: ₹20 crore of proceeds, ₹50 lakh of cost, thirty-six months held. Switch the route to buyback, then switch the founder from promoter to non-promoter. Drag the months below twenty-four. Then put money into a house and watch the exemption.

The exemption in the last slider is the one founders most often leave unused. Under what was section 54F, an individual or HUF who sells any long-term capital asset other than a residential house can exempt the gain by investing the net consideration in one residential house in India, bought one year before or two years after the sale, or built within three years. Invest all of it and the whole gain is exempt; invest part and the exemption is proportionate. Since assessment year 2024-25 the investment counts only up to ₹10 crore, as the Income Tax Department’s guidance explains. Money not invested by the return due date goes into a Capital Gains Account Scheme deposit, and the exemption is withdrawn if the new house is sold within three years or a second house is acquired. The bonds route that was section 54EC is open only to gains on land or buildings, so it does not help a share sale.

The price is negotiated once. The route, the date and the holding period decide how much of it stays.

Founders and investors outside India

A founder who has moved abroad, or an investor holding through Mauritius or Singapore, will ask whether a tax treaty removes the Indian tax. The answer became harder on 15 January 2026, when the Supreme Court decided the appeals of the Tiger Global entities over their 2018 sale of Flipkart shares. As AZB & Partners summarise the ruling, the Court held that a tax residency certificate is not conclusive, that treaty benefits depend on the arrangement not being an impermissible avoidance arrangement under the general anti-avoidance rules, that the India-Mauritius exemption it considered covered only shares a Mauritian resident held directly, and that GAAR can apply to an exit after 1 April 2017 even where the investment was made before that date. Any structure that relies on a treaty now needs substance on the ground and a written opinion before the term sheet, and the buyer will want comfort on its own obligation to withhold tax from the payment.

Before any exit conversation

Twelve months before a likely sale or secondary, build a one-page tax sheet for each founder: shares held, date of each allotment, cost of each lot, and the date on which each lot becomes long-term. When a buyer or investor appears, check the dates before agreeing a timetable; a closing pushed by a month can move a lot from slab rate to 12.5 per cent. Ask the company secretary whether each founder is a promoter for the purposes of the buyback rules, and prefer a sale to a buyback where the answer is yes. Commission a merchant banker’s or registered valuer’s report before any transfer below the last round price, so the deemed-value rule holds no surprise. Decide before closing whether to use the house exemption and diarise its one, two and three-year limits. For founders or investors abroad, get the treaty opinion in writing. Review the sheet at every board meeting where an exit is discussed.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.