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Section 68 of the Companies Act, 2013 lets a company buy back its own shares out of free reserves, the securities premium account, or the proceeds of an issue of a different kind of shares or securities. Four numerical tests then apply together, and the smallest answer is the maximum. First, the size limit: with a special resolution the buy-back can be up to 25% of the aggregate of paid-up capital and free reserves; with only a Board resolution it can be up to 10% of paid-up equity capital and free reserves. Second, for equity shares, the 25% is read in any financial year against total paid-up equity capital — so no more than a quarter of the equity shares can go in a year, whatever the reserves allow. Third, after the buy-back the company’s secured and unsecured debt must not be more than twice its paid-up capital and free reserves. Fourth, the money has to come from a permitted source.
The debt-equity test is where most manual workings go wrong. Paying for the shares reduces capital and free reserves by the amount paid. Section 69 then requires a sum equal to the nominal value of the shares bought back to be moved to the capital redemption reserve when the buy-back is funded from free reserves or securities premium — and that reserve is not a free reserve. So the denominator falls by the price paid plus the nominal value. This calculator solves for the largest buy-back at which debt is still no more than twice what is left: maximum nominal value = (capital and free reserves − half of debt) ÷ (1 + price ÷ face value).
Two conditions are not arithmetic at all. No offer of buy-back can be made within one year from the closure of the preceding offer, and Section 70 bars a buy-back while the company is in default on deposits, debentures, preference shares, dividend or term loans from banks and financial institutions — the bar lifting only when the default is remedied and three years have passed. The calculator reports these as a stop, alongside the figure the limits would otherwise allow. Listed companies must also follow the SEBI (Buy-Back of Securities) Regulations, 2018, which add their own conditions; unlisted companies follow Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014.
Tax has changed three times in two years, so the date of the buy-back matters. Up to 30 September 2024 the company paid tax at 20% under Section 115QA of the Income-tax Act, 1961. From 1 October 2024 to 31 March 2026 the whole consideration was a deemed dividend in the shareholder’s hands under Section 2(22)(f), with the cost of the shares allowed only as a capital loss under Section 46A. For buy-backs on or after 1 April 2026 — tax year 2026-27 under the Income-tax Act, 2025 — the Finance Act, 2026 moved buy-backs back to capital gains under Section 69 of the new Act: the shareholder is taxed on consideration less cost, and promoters bear an additional income-tax.
A company has paid-up equity capital of ₹1,000 lakh (1 crore shares of ₹10), no preference capital, free reserves including securities premium of ₹3,000 lakh and total debt of ₹4,000 lakh. It proposes a buy-back at ₹50 per share with a special resolution.
