A company sitting on surplus cash — or needing to buy out a shareholder — has two main routes to return or reduce its capital: a buyback under Section 68, or a reduction of capital under Section 66. They differ in how much you can return, how long it takes, whether the NCLT is involved, and — since a major 2024 change — how the proceeds are taxed. This guide compares them so you can pick the right one. For the opposite move — raising your capital — see our guide to increasing authorised capital.
Why a company returns capital
Companies return capital for several reasons: to deploy surplus cash efficiently, to boost earnings per share by shrinking the share count, to consolidate ownership (promoters' percentage rises as shares are cancelled), to give shareholders a structured exit — especially valuable in unlisted or private companies with limited liquidity — and sometimes as a takeover defence.
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Route 1 — Buyback (Section 68)
A buyback is where the company repurchases its own shares from shareholders and cancels them, reducing its capital. It can be funded only from the company's free reserves, securities premium account, or the proceeds of a fresh issue of shares — and never from the proceeds of an earlier issue of the same kind of security.
The conditions
Before a buyback under Sections 68-70, a company must satisfy all of the following:
- AOA authorisation — the Articles must permit buyback; if silent, amend the AOA by special resolution first (and file MGT-14).
- Authorising resolution — a board resolution allows a buyback of up to 10% of paid-up equity capital and free reserves; a special resolution is needed for a buyback above 10% and up to 25%.
- The 25% ceiling — a buyback cannot exceed 25% of the aggregate of paid-up capital and free reserves (and, for equity, the shares bought back can't exceed 25% of total paid-up equity in that financial year).
- Debt-equity ratio — after the buyback, total debt must not exceed twice the paid-up capital and free reserves (a 2:1 ratio).
- Fully paid-up shares only.
- Cooling-off rules — no fresh issue of the same kind of shares for 6 months after a buyback (with limited exceptions), and a 1-year gap between two buybacks.
- The buyback must be completed within one year of the resolution.
The forms and process
- Pass the board or special resolution.
- File a Letter of Offer in Form SH-8 with the ROC.
- File a Declaration of Solvency in Form SH-9 (signed by two directors).
- Maintain a separate bank account for buyback proceeds.
- Extinguish (destroy) the bought-back shares within 7 days of completion.
- File the Return of Buyback in Form SH-11 within 30 days of completion.
(Listed companies must additionally follow the SEBI Buy-Back Regulations.)
The 2024 tax change that reshaped buybacks
This is the development that changes the whole calculation. Until 1 October 2024, buyback proceeds were tax-free in the shareholders' hands (Section 10(34A)), while the company paid a flat buyback tax under Section 115QA. From 1 October 2024, that regime was abolished — buyback proceeds are now taxed as a deemed dividend in the shareholders' hands, at their applicable slab rates.
The practical effect: buyback is now materially less tax-efficient for shareholders than before, and this has pushed some companies to look again at capital reduction under Section 66 as a comparatively more tax-efficient way to scale down capital. Any buyback decision now has to be modelled with the shareholder-level tax in mind.
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Route 2 — Reduction of Capital (Section 66)
A reduction of capital is the more formal route: the company reduces its share capital — returning capital that is in excess of its needs, cancelling capital that has been lost, or reducing the liability on partly paid shares.
The process
- Pass a special resolution of the members;
- apply to the National Company Law Tribunal (NCLT) for confirmation;
- give notice to the Central Government, ROC, SEBI (if listed), and creditors, who may object; and
- on the NCLT's confirmation, file the order with the ROC.
Because it needs NCLT approval and a creditor-objection process, reduction is slower and more involved than a buyback — typically several months — but it carries no percentage cap.
When you must use reduction instead of buyback
If you want to reduce capital by more than 25%, you cannot do it as a buyback under Section 68 — it must go through capital reduction under Section 66. And post-2024, some companies choose the Section 66 route even within 25%, for its different (and often more favourable) tax treatment.
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Buyback vs reduction at a glance
| Buyback (Sec 68) | Reduction (Sec 66) | |
|---|---|---|
| Cap | ≤ 25% of paid-up + reserves | No percentage cap |
| Approval | Board (≤10%) / special resolution (≤25%) | Special resolution + NCLT |
| Speed | Faster (self-tender) | Slower (NCLT process) |
| Creditor process | No formal objection stage | Notice to creditors/regulators |
| Tax (post-Oct 2024) | Deemed dividend in shareholders' hands | Often capital-gains treatment (case-specific) |
Which route to choose
- Buyback suits a quick, self-managed return of up to 25%, where you want to avoid the NCLT — accepting the deemed-dividend tax on shareholders.
- Reduction suits larger reductions (beyond 25%), or situations where the tax treatment makes it more efficient — accepting the NCLT timeline and process.
Because the tax positions now diverge sharply, model both before deciding — the "right" route is as much a tax question as a legal one.
Common mistakes to avoid
- AOA not authorising buyback — amend it (special resolution + MGT-14) first.
- Exceeding 25% via buyback — that must go through Section 66 reduction.
- Breaching the 2:1 debt-equity ratio post-buyback.
- Missing SH-8, SH-9, or the SH-11 return within its timeline.
- Assuming buyback is still tax-free to shareholders — it isn't, since October 2024.
A note on changing rules
Both the company-law procedure and the tax treatment of capital returns have changed recently and remain under review. Treat this as a current-position guide and model the tax with a professional before choosing your route.
Conclusion
Returning capital comes down to two routes with a sharply different character. A buyback (Section 68) is the faster, self-managed option — up to 25%, via SH-8, SH-9, and SH-11, with no NCLT — but since October 2024 its proceeds are taxed as a deemed dividend in shareholders' hands. A reduction of capital (Section 66) has no cap and can be more tax-efficient, but requires NCLT approval and a creditor process. With the tax positions now diverging, choose the route that fits both your size of return and your shareholders' tax position.
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FAQs
1. What is a share buyback? A buyback is where a company repurchases its own shares from shareholders and cancels them, reducing its capital — funded from free reserves, securities premium, or fresh-issue proceeds, under Section 68.
2. How much can a company buy back? Up to 25% of the aggregate of paid-up capital and free reserves. A board resolution allows up to 10%; a special resolution is needed above 10% and up to 25%. Beyond 25%, you must use capital reduction under Section 66.
3. Is buyback still tax-free for shareholders? No. Until 1 October 2024, buyback proceeds were tax-free to shareholders (the company paid tax under Section 115QA). From 1 October 2024, proceeds are taxed as a deemed dividend in the shareholders' hands at their slab rates.
4. What forms are filed for a buyback? A Letter of Offer in SH-8, a Declaration of Solvency in SH-9, and a Return of Buyback in SH-11 within 30 days of completion. Bought-back shares must be extinguished within 7 days.
5. What is reduction of capital under Section 66? A formal reduction of share capital requiring a special resolution and NCLT confirmation, with notice to creditors and regulators. It has no percentage cap but is slower than a buyback.
6. Buyback or capital reduction — which is better? Buyback is faster and needs no NCLT but is capped at 25% and now taxed as a deemed dividend. Reduction has no cap and can be more tax-efficient but requires the NCLT. Model the tax for both before deciding.
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Suggested Internal Links
- Increase in Authorised Capital (SH-7) → `/increase-authorised-capital-sh-7/` — anchor: "increasing capital instead"
- MGT-14 (Board & Special Resolutions) → `/mgt-14-resolutions-filing/` — anchor: "the special resolution and AOA amendment"
- Share Certificate Issuance → `/share-certificate-issuance/` — anchor: "shares and shareholding"
- ITR: Capital Gains & F&O → `/itr-capital-gains-fno/` — anchor: "capital gains on your shares"
- Buyback / Capital Reduction Service → `/services/buyback-capital-reduction/` — anchor: "buyback or capital reduction support"
- Company Compliance Service → `/services/company-compliance/` — anchor: "end-to-end secretarial compliance"
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About the author
Srishty
Senior Advisor at Regikart. Want to discuss this in the context of your business?
