Section 46 and Section 46A: Capital Gains on Company Liquidation and Buyback of Shares

Sections 46 and 46A of the Income-tax Act, 1961 dealt with capital gains arising from distribution of assets on liquidation and purchase by a company of its own shares or other specified securities. From 1 April 2026, the Income-tax Act, 2025 applies and the corresponding provisions are Sections 68 and 69.

Updated: 28 September 2026

Section 46 of the Income-tax Act, 1961: Distribution of Assets by a Company in Liquidation

Section 46 addressed the capital-gains consequences when a company in liquidation distributes its assets to shareholders. It separated the tax treatment of the company from that of the shareholder.

Section 46(1): treatment in the hands of the company

Under Section 46(1), notwithstanding Section 45, distribution of a company's assets to its shareholders on liquidation was not regarded as a transfer by the company for the purposes of the capital-gains charging provision. In other words, the act of distributing the assets on liquidation did not itself create a capital-gains transfer in the hands of the liquidating company under Section 45.

Section 46(2): treatment in the hands of the shareholder

Where a shareholder received money or other assets on liquidation, Section 46(2) charged the shareholder under the head "Capital gains". Broadly, the relevant amount was the money received plus the market value of other assets on the date of distribution, reduced by the amount assessed as dividend under Section 2(22)(c). The balance was treated as the full value of consideration for computation under Section 48.

Current Law: Section 68 of the Income-tax Act, 2025

Section 68 of the Income-tax Act, 2025 is the corresponding current provision. The structure remains substantially the same: distribution of assets on liquidation is not treated as a transfer by the company for the capital-gains charging provision, while money or assets received by the shareholder can give rise to capital gains.

Under the current numbering, Section 68 refers to Section 67 for the capital-gains charging provision, Section 2(40)(c) for the relevant dividend component, and Section 72 for the mode of computation.

Section 46A of the Income-tax Act, 1961: Purchase by Company of Its Own Shares or Other Specified Securities

Section 46A dealt with the shareholder or holder of specified securities when a company purchased its own shares or other specified securities. Subject to the computation provision, the difference between the cost of acquisition and the consideration received was treated as capital gains in the year of purchase by the company.

For buybacks taking place on or after 1 October 2024 under the 1961 Act regime, a special proviso treated the value of consideration as nil for capital-gains computation where the consideration fell within the then applicable deemed-dividend provision. That rule operated alongside the post-1 October 2024 shareholder-level dividend treatment.

Current Law: Section 69 of the Income-tax Act, 2025 and Buyback Taxation

Section 69 is the current counterpart of old Section 46A. For the tax year beginning 1 April 2026, the law was rationalised so that consideration received on buyback is dealt with under the capital-gains framework rather than the earlier deemed-dividend approach.

General computation under Section 69(1)

Where a shareholder or holder of other specified securities receives consideration from a company for purchase of its own shares or specified securities, the difference between the cost of acquisition and the consideration received is treated as capital gains, subject to Section 72.

Additional tax where the holder is a promoter

For a promoter, Section 69 as amended for the current regime provides an additional income-tax component on the relevant capital gains. The statutory additional rates are 2% for specified short-term capital gains and 9.5% for specified long-term capital gains where the promoter is a domestic company; for a promoter other than a domestic company, the corresponding additional rates are 10% and 17.5%.

The provision also defines "promoter" for this purpose. For a listed company, the statutory definition refers to the applicable SEBI buyback regulations. In other cases it includes a promoter under Section 2(69) of the Companies Act, 2013 and a person directly or indirectly holding more than 10% of the company's shareholding.

Meaning of specified securities

Under current Section 69, "specified securities" carries the meaning assigned in Explanation 1 to Section 68 of the Companies Act, 2013. This modernises the cross-reference that appeared in old Section 46A, which referred to the Companies Act, 1956.

Old Sections 46 and 46A Compared with Current Sections 68 and 69

Simple Illustrations

Liquidation

Suppose a shareholder receives Rs. 8,00,000 in cash and assets having a market value of Rs. 2,00,000 on liquidation. If Rs. 1,50,000 is treated as the relevant dividend component, the amount taken as full value of consideration for the liquidation capital-gains computation would broadly be Rs. 8,50,000, before applying the remaining computation provisions.

Buyback under the current regime

If shares having a cost of acquisition of Rs. 4,00,000 are bought back by the company for Rs. 6,00,000 in a transaction governed by the current Section 69 regime, the starting capital gain is Rs. 2,00,000, subject to the other applicable provisions. If the holder falls within the statutory promoter category, the special additional-tax provisions must also be examined.

Practical Points

Always identify the transaction date first. For liquidation, determine separately the amount treated as dividend and the balance relevant for capital gains. For buybacks, determine whether the transaction falls under the pre-1 October 2024 rules, the transitional 1 October 2024 to 31 March 2026 rules, or the current regime from 1 April 2026. The cost of acquisition, holding period, status of the shareholder and promoter status can affect the final tax result.

This article is a general statutory guide. Tax consequences can vary with the facts, transaction date, tax year, residential status, treaty position and subsequent amendments.