Capital Reduction vs Dividend on Wind-down: Tax implications for Founders and Investors

Founders who have decided to wind down face one question that almost no article answers directly: once creditors are settled and there is cash left, is it better to distribute that surplus via a formal dividend or via a share capital reduction under section 66 of the Companies Act 2013? The answer turns on two numbers the company’s balance sheet already contains: accumulated profits and original paid-up capital. Get the sequencing wrong and shareholders pay tax twice on the same rupee.

This article maps the full tax picture for both routes under the current regime, Finance Act 2020 abolished DDT, shifting tax to shareholders, and gives founders a structure for the conversation they need to have with their board and their CA before the first cheque is written.

What the law actually says: section 2(22)(d) and deemed dividend

The cleanest way to understand the capital reduction vs dividend distribution India tax question is to start with section 2(22) of the Income Tax Act 1961 (which has been renumbered but substantively retained in the Income Tax Act 2025 effective 01/04/2026).

Section 2(22) defines dividend to include several distributions that are not formally declared as dividend. Clause (d) is the one that governs capital reduction: any distribution made by a company to its shareholders on the reduction of its capital, to the extent the company has accumulated profits (whether capitalised or not), is treated as deemed dividend. This means the law does not care what you call the payment. If the company has profits sitting on the books and it returns money to shareholders via a capital reduction, the Income Tax Department will treat the distribution as dividend income in the hands of the shareholders, up to the amount of accumulated profits.

The expression “accumulated profits” under Explanation 2 to section 2(22) includes all profits of the company up to the date of distribution or payment. This includes capitalised profits (i.e., those already converted into bonus shares). It does not include capital gains arising before 01/04/1946 or between 01/04/1948 and 01/04/1956, but for a modern startup those carve-outs are irrelevant.

A straight dividend declared by the board under section 123 of the Companies Act 2013 attracts the same tax treatment in the hands of shareholders. Both routes, therefore, carry the same deemed dividend characterisation to the extent of accumulated profits. The meaningful tax difference emerges only when the distribution exceeds accumulated profits, and when cost of acquisition mechanics under section 55 are applied.

Table 1: Deemed dividend, how the two routes compare at a glance

Parameter	Dividend route	Capital reduction route (section 66)
Tax characterisation (up to accumulated profits)	Dividend, taxable as income from other sources	Deemed dividend under section 2(22)(d), same treatment
Tax rate in shareholder’s hands	Applicable slab rate for individuals; 22% + surcharge for domestic companies	Same
TDS by company	10% u/s 194 if dividend exceeds ₹10,000 in FY to resident shareholders	Same, section 194 applies to deemed dividend too
What happens above accumulated profits	Not applicable, dividend cannot exceed distributable surplus	Capital gains: excess over accumulated profits and cost of acquisition is taxable
Regulatory approval required	Board resolution + shareholder approval	Special resolution + NCLT confirmation
Timeline	2-4 weeks	3-6 months
Can preference shareholders be treated differently	Yes, subject to SHA	Yes, but selective reduction faces NCLT scrutiny

How accumulated profits are calculated, and why it matters

The ₹ figure that separates dividend taxation from capital gains taxation is the company’s accumulated profits as on the date of distribution. This is not the same as retained earnings on the balance sheet, and getting this calculation right is the single most important step before choosing a route.

Accumulated profits include:

• All revenue profits earned by the company since incorporation, up to the distribution date
• Profits that were capitalised (i.e., used to issue bonus shares), these are added back
• General reserves and securities premium to the extent they represent distributable profits (this is often disputed; Treelife takes a conservative view and includes reserves created from profits)

Accumulated profits do not include:

• Share application money and paid-up capital contributed by shareholders
• Capital reserves arising from revaluation of assets
• Securities premium collected on equity issuance (this is a capital receipt, not a profit)

For most VC-backed startups that have been loss-making, accumulated profits will be zero or negative. In that case, section 2(22)(d) does not bite at all, the entire capital reduction payment goes straight to capital gains computation. This is actually the more common scenario in early-stage wind-downs, and it dramatically changes the tax arithmetic.

For startups that became profitable before winding down, say a SaaS company with two or three years of positive EBITDA before founders decided to return capital, accumulated profits can be significant and the sequencing of the distribution matters enormously.

The two-layer tax model for capital reduction

When a company with accumulated profits undertakes capital reduction, the tax operates in two distinct layers.

Layer 1, Deemed dividend to the extent of accumulated profits

This amount is taxed in the hands of the shareholders as income from other sources under section 56. The rate is the shareholder’s applicable income tax rate. For an individual founder in the highest bracket, this is effectively 30% plus surcharge and cess (approximately 35.88% for income above ₹5 crore). For a domestic company shareholder, the rate is 22% under the concessional regime (section 115BAA) or 30% under the regular regime. For a foreign company, 40% plus applicable surcharge applies.

The company is required to deduct TDS under section 194 at 10% on the deemed dividend paid to resident shareholders where the aggregate dividend in the FY exceeds ₹10,000. No TDS is required for non-resident shareholders under section 194, instead, section 195 applies and the rate depends on the applicable Double Taxation Avoidance Agreement (DTAA). For Mauritius-resident investors, for instance, the rate under the India-Mauritius DTAA (as amended in 2017) is 7.5% for investments made before 01/04/2017 and full domestic rates for post-April 2017 investments.

Layer 2, Capital gains on the excess

If the total amount distributed on capital reduction exceeds the sum of (a) accumulated profits and (b) the cost of acquisition of shares in the hands of the shareholder, the excess is treated as capital gains under section 45 read with section 55.

Section 55(2)(b) defines the cost of acquisition of shares received by the shareholder as the amount paid at the time of subscribing or acquiring those shares. For a founder who received shares for ₹1 each, the cost is ₹1 per share. For an investor who subscribed to preference shares at ₹100 each, the cost is ₹100 per share.

Holding period determines whether the gain is long-term or short-term. Shares held for more than 24 months qualify as long-term capital assets. For unlisted shares (which almost all VC-backed startups are), the LTCG rate post-Budget 2024 is 12.5% without indexation benefit (this was the key Budget 2024 change, the earlier 20% with indexation for unlisted shares was replaced with 12.5% without indexation, effective 23/07/2024). STCG on unlisted shares is taxed at the applicable slab rate.

Numerical illustration, capital reduction with accumulated profits

Assume: Company has paid-up capital of ₹10 lakh, accumulated profits of ₹40 lakh, and ₹80 lakh in cash. Three shareholders: Founder A (40% equity, cost ₹4 lakh), Investor B (40% preference, cost ₹20 lakh), Investor C (20% preference, cost ₹10 lakh). Total capital reduction distribution: ₹80 lakh.

Component	Total (₹ lakh)	Deemed dividend	Capital gains base
Distribution to shareholders	80	40 (= accumulated profits)	40 (= excess)
Founder A’s share (40%)	32	16 (deemed dividend)	16 less ₹4 lakh cost = ₹12 lakh LTCG
Investor B’s share (40%)	32	16 (deemed dividend)	16 less ₹20 lakh cost = nil LTCG
Investor C’s share (20%)	16	8 (deemed dividend)	8 less ₹10 lakh cost = nil LTCG

In this example, Investor B and C recover less than their cost on the capital gains layer, there is no negative capital gain for them from this transaction (the loss arises separately when shares are cancelled). Founder A pays income tax on ₹16 lakh as dividend income and capital gains tax at 12.5% on ₹12 lakh.

Does the dividend route offer any tax advantage over capital reduction?

This is where founders often assume the answer is no, and they are mostly right for companies with accumulated profits. But there are four specific situations where the structuring choice matters.

Situation 1, Company has no accumulated profits (typical loss-making startup)

For a startup that has been burning cash and has no retained profits, section 2(22)(d) does not apply to a capital reduction. The entire distribution is treated as a return of capital and triggers capital gains computation (distribution received minus cost of acquisition). A straight dividend in this case cannot legally be declared, section 123 of the Companies Act 2013 prohibits declaring dividend out of paid-up capital. So capital reduction is the only route, and the tax consequence is purely capital gains.

Situation 2, Founders want to preserve long-term capital gains treatment

A dividend is always taxable as income from other sources regardless of how long shares were held. Capital gains attract 12.5% for long-term assets (unlisted shares held more than 24 months). If a founder has held shares for more than 24 months and the distribution will exceed accumulated profits, the excess amount benefits from the lower LTCG rate. This makes capital reduction structurally preferable if: (a) accumulated profits are low relative to total distribution, and (b) most shareholders are long-term holders.

Situation 3, NRI or foreign shareholders with DTAA benefit

For a dividend, the applicable domestic TDS rate is 20% for NRIs under section 194E (or DTAA rate if lower, typically 10-15%). For capital gains on unlisted shares, most DTAAs assign taxing rights to India for shares of an Indian company, but the rate and computation may differ. Founders with significant foreign shareholders should get a DTAA-specific analysis before choosing the route.

Situation 4, Shareholder with carry-forward capital losses

A shareholder who has carry-forward capital losses from other investments can set those off against capital gains arising from a capital reduction. This is not available against dividend income. If an investor has existing capital losses in their books, capital reduction can produce a lower net tax outflow.

How the VC liquidation preference stack changes the calculation

This is the section that most tax articles miss entirely, and it is the one that creates the most disputes in actual wind-downs.

VC-backed startups almost always have preference shares with a liquidation preference. The SHA (Shareholder Agreement) will specify a waterfall: preference shareholders get paid first (typically 1x non-participating or 1x participating), then equity shareholders receive the residual. If you want a detailed breakdown of how liquidation preferences work in Indian term sheets, Treelife’s guide on liquidation preference in venture capital deals walks through the different structures.

The tax complication arises because Indian company law and Indian tax law do not automatically align with the contractual preference waterfall.

Under section 2(22)(d), accumulated profits are distributed pro-rata to the shareholders based on their shareholding, unless the capital reduction scheme specifically allocates amounts differently. If a capital reduction scheme pays ₹40 lakh to preference shareholders and ₹10 lakh to equity shareholders (reflecting the contractual waterfall), the deemed dividend allocation and capital gains computation must be done separately for each class based on amounts actually received, not pro-rata shareholding.

The NCLT, while confirming the capital reduction scheme under section 66, will require a clear statement of how amounts are distributed across classes. The scheme must be fair to all classes, which means the liquidation preference waterfall needs to be documented in the reduction petition itself. If creditors or minority shareholders object, NCLT can require modifications.

For a dividend distribution, the Companies Act does not permit preferential dividends on equity shares, dividend is paid pro-rata on paid-up capital of the same class. Preference shareholders receive their stated dividend (which may be cumulative), and the remaining goes to equity. This makes a straight dividend less flexible than a capital reduction when the SHA waterfall deviates significantly from the legal distribution rules.

Practical implication: In most VC-backed wind-downs, capital reduction under section 66 is the preferred route precisely because it allows the contractual liquidation preference to be implemented through the court-sanctioned scheme, with full tax implications flowing from the actual amounts received by each class.

For the operational mechanics of shutting down, from the NCLT application to striking off, our complete guide to winding up a company in India covers the full process.

TDS obligations, what the company must do before distributing

Post-DDT abolition (Finance Act 2020), the company distributing via either route has TDS obligations that are often underestimated.

For dividend distribution:

Under section 194, TDS at 10% is deducted on dividend paid to resident individuals and HUFs where the aggregate dividend exceeds ₹10,000 in a financial year. The TDS limit was revised from ₹5,000 to ₹10,000 effective FY 2025-26. For domestic company shareholders, section 194 applies at 10%. For non-residents, section 195 applies and the rate is the lower of domestic law rate (20% for dividends to non-residents under section 115A) or the applicable DTAA rate.

For capital reduction, deemed dividend portion:

The deemed dividend portion of a capital reduction payment is also subject to TDS under section 194. The company must compute the accumulated profits as on the reduction date, allocate them across shareholders, and deduct TDS on those amounts before making payment. The capital gains portion is not subject to TDS (section 194 does not apply to capital gains).

This creates a compliance sequence the company must follow:

1. Compute accumulated profits as on the date of the capital reduction scheme taking effect
2. Determine deemed dividend component for each shareholder
3. Deduct TDS at 10% on the deemed dividend component for resident shareholders
4. Pay the net amount to each shareholder
5. File Form 26Q (for residents) or Form 27Q (for non-residents) within the prescribed due dates
6. Issue Form 16A to resident shareholders

Failure to deduct TDS makes the company an assessee in default under section 201, attracting interest at 1.5% per month and potential penalty under section 271C equal to the TDS amount. This is a clean-up cost that founders often overlook when they are trying to wind down quickly.

What happens to the shares post-capital reduction, the section 45 capital gains computation

When shares are cancelled pursuant to capital reduction, this constitutes a transfer in the hands of the shareholders within the meaning of section 2(47) of the Income Tax Act. The capital gains computation then follows section 48:

Full value of consideration received: Total amount received on capital reduction (less deemed dividend already taxed)

Less: Cost of acquisition under section 55

Less: Cost of improvement (usually nil for shares)

Equals: Capital gain (or loss)

The deemed dividend amount already taxed in the shareholder’s hands is deducted from the total consideration before computing capital gains. This prevents double taxation, the same rupee is not taxed twice. This deduction is critical and must be reflected in the shareholder’s ITR.

The holding period is computed from the date of original acquisition of the shares to the date of cancellation. For founders who received sweat equity or ESOP shares that were exercised years ago, the holding period calculation must account for the exercise date (for ESOPs), not the vesting date.

Is there a scenario where a capital reduction produces a capital loss?

Yes, and this is surprisingly common in startups that raised multiple rounds at high valuations.

Consider a Series B investor who invested ₹5 crore for a 15% stake (₹100 per share, 5 lakh shares). The company winds down with ₹3 crore in cash. After paying preference waterfall and assuming this investor receives ₹2 crore (still ahead of equity), their capital gains computation is:

Amount received: ₹2 crore Less: Deemed dividend component (say ₹30 lakh from their share of accumulated profits): ₹1.70 crore taxable as capital Less: Cost of acquisition: ₹5 crore

Capital loss: ₹3.30 crore

This is a long-term capital loss (assuming shares held more than 24 months) which can be set off against other long-term capital gains in the same FY and carried forward for 8 assessment years under section 74. For institutional investors with portfolio-level gains, this carry-forward is genuinely valuable and should be factored into the wind-down conversation.

The dividend income of ₹30 lakh, however, is fully taxable in the year of receipt with no offset against the capital loss.

Practitioner’s note: What we see going wrong in actual wind-downs

Three patterns repeat in the wind-downs Treelife has been called in to clean up.

First: founders declare a final dividend before initiating capital reduction, not realising that doing so reduces accumulated profits (they are paid out), which then reduces the deemed dividend in the capital reduction and pushes more of the capital reduction distribution into the capital gains bucket. For long-term shareholders, this can be tax-positive. For short-term holders, it can increase the overall tax bill. The sequencing of dividend vs capital reduction should be modelled before either is initiated.

Second: companies fail to compute accumulated profits correctly. They use the retained earnings figure from the last audited balance sheet rather than computing the figure as on the date of distribution, incorporating current year profits or losses. The Income Tax Department has taken the position in assessments that accumulated profits must be computed up to the actual date of distribution, including interim period P&L. An unaudited current-year profit can create an unexpected deemed dividend liability.

Third: TDS is not deducted on the deemed dividend component of the capital reduction because the company’s finance team treats the entire capital reduction payment as a capital return. This is factually incorrect under section 2(22)(d) and results in the company being treated as an assessee in default.

Comparison: Capital Reduction vs Dividend for a Wind-down, decision framework

Table 2: Which route suits your situation

Scenario	Recommended route	Reason
Company has zero or negative accumulated profits	Capital reduction	Dividend legally not permissible; capital reduction gives capital gains treatment
Company has significant accumulated profits and shareholders are long-term holders	Capital reduction with careful surplus computation	Excess over accumulated profits taxed at 12.5% LTCG for long-term holders
Company has significant accumulated profits and shareholders have short holding periods	Either route, tax outcome similar	Both routes tax the accumulated-profit portion at slab rates
VC-backed company with preference share waterfall in SHA	Capital reduction	Allows contractual waterfall to be implemented via NCLT-sanctioned scheme
Investors have carry-forward capital losses	Capital reduction	Capital gains can be set off against losses; dividend income cannot
Timeline is urgent (less than 3 months)	Dividend route for the dividend-permissible portion	Capital reduction requires NCLT confirmation (3-6 months); dividend can be declared quickly
NRI or foreign shareholders with favourable DTAA	Requires case-specific DTAA analysis	Rate on deemed dividend and capital gains differs by treaty

Does the capital reduction route survive the Philips India NCLT order of September 2024?

The NCLT Kolkata bench rejected a section 66 petition by Philips India Limited in September 2024, holding that the company’s primary objective was to buy back shares from minority public shareholders, which Section 66 of the Companies Act 2013 now explicitly excludes (section 66 states that nothing in it shall apply to buyback of securities under section 68).

This ruling affects selective capital reduction, where only certain shareholders’ shares are cancelled, that effectively operates as a buyback. It does not affect capital reduction across all shareholders in a wind-down context, which is a fundamentally different situation. In a wind-down, all shares are being cancelled proportionally (or in accordance with the class rights in the SHA), not a subset of minority shareholders being squeezed out.

For startup wind-downs, the Philips India precedent is largely irrelevant. The NCLT’s concern was about using section 66 to circumvent section 68 buyback regulations. A genuine wind-down capital reduction, where the company is distributing surplus after settling all creditors and intends to dissolve, does not raise those concerns.

If your capital reduction scheme proposes to cancel investor preference shares while retaining founder equity (for instance, to reflect a 1x liquidation preference in a scenario where remaining cash exactly covers the preference), you should expect NCLT scrutiny. Get legal advice on scheme design before filing.

For founders who are evaluating whether to wind down through a formal capital reduction or through voluntary liquidation under the IBC, Treelife’s guide to shutting down a startup sets out the pros and cons of each route from a compliance perspective.

Case study: SaaS startup wind-down, Mumbai, FY 2024-25

Situation: Series A SaaS company, 6 years old, Bengaluru-based. Raised ₹12 crore total (₹4 crore seed, ₹8 crore Series A at 1x non-participating preference). Product-market fit not achieved. Board resolved to wind down with ₹2.8 crore in cash after settling all employee dues, vendor payments, and tax liabilities. Accumulated profits: ₹18 lakh (from a profitable FY 2021-22). Investor cost: ₹8 crore. Founder cost: ₹4 lakh (1 crore shares at ₹0.004 each).

Challenge: The investor held 40% preference and was entitled to 1x preference (₹8 crore) before any equity distribution. Total cash available was ₹2.8 crore, far less than the 1x preference. The SHA required investor consent for any distribution event. Two founders wanted to complete the wind-down within four months (before the next FY), and the company had never undergone NCLT proceedings.

What Treelife did: Structured a capital reduction scheme under section 66, allocating the full ₹2.8 crore to the investor class per the SHA waterfall. Computed accumulated profits of ₹18 lakh and deducted TDS on the deemed dividend component allocated to the investor (₹18 lakh at 10% = ₹1.8 lakh TDS). The remaining ₹2.782 crore less TDS was paid to the investor. Founders received zero (correctly reflecting the waterfall). Computed investor capital loss: ₹8 crore cost minus ₹2.8 crore received (less ₹18 lakh deemed dividend deducted) = capital loss of approximately ₹5.38 crore available for carry-forward.

Outcome: NCLT confirmation obtained in 14 weeks. Investor carried forward ₹5.38 crore in long-term capital loss, set off against gains from a portfolio exit in the same FY, generating approximately ₹67 lakh in tax savings at the applicable rate. Founders filed ITRs correctly reflecting zero distribution and no capital gain on their shares.

FAQ on Capital Reduction vs Dividend when Shutting Down

Q: Is a capital reduction always treated as deemed dividend under Indian tax law?
A: Only to the extent the company has accumulated profits on the date of distribution. If accumulated profits are zero or negative, no deemed dividend arises and the distribution is treated as a capital return, triggering capital gains computation.

Q: What is the tax rate on deemed dividend from capital reduction for an individual shareholder?
A: Deemed dividend is taxed as income from other sources at the applicable slab rate. For an individual in the highest bracket (income above ₹5 crore), the effective rate including surcharge and cess is approximately 35.88%.

Q: Can the company claim a deduction for dividend paid or deemed dividend under a capital reduction?
A: No. A dividend payment is not a deductible expense for the company. The abolition of DDT from 01/04/2020 removed the company-level tax, but it did not make dividend deductible.

Q: Is TDS required on the capital gains component of a capital reduction payment?
A: No. Section 194 applies only to the dividend / deemed dividend component. TDS is not deductible on the capital gains component paid to resident shareholders.

Q: How long does an NCLT-confirmed capital reduction take from start to finish?
A: For an uncomplicated private limited company with no public shareholders, expect 10-18 weeks from filing the petition to receiving the NCLT order. Contested or complex schemes can take 6-12 months.

Q: Can a startup with carry-forward losses under section 72 declare a dividend?
A: Carry-forward of business losses under section 72 does not directly restrict dividend declaration, dividends are governed by section 123 of the Companies Act 2013, which requires distributable profits (not taxable profits). A company can have distributable accounting profits and carry-forward tax losses simultaneously. However, if the company has accumulated accounting losses (negative retained earnings), no dividend can be declared.

Q: Do preference shareholders and equity shareholders have different tax treatment in a capital reduction?
A: The tax treatment follows the amount received, not the class of shares. Whether you hold preference or equity shares, the amount you receive on capital reduction is first characterised as deemed dividend (to the extent of your share of accumulated profits), then as capital gains (to the extent the remainder exceeds your cost of acquisition). The holding period and applicable rates depend on when you acquired your shares, not what class they are.

Q: What happens to ESOP holders in a wind-down capital reduction?
A: ESOP holders who have already exercised their options hold shares like any other shareholder. Unexercised options lapse on wind-down (per the ESOP scheme terms). For exercised ESOP holders, the capital reduction tax computation works the same way, but their cost of acquisition is the FMV on exercise date (which was already taxed as perquisite). They should not pay capital gains tax on the perquisite component again.

Q: If the company has FEMA-compliant foreign investors, does a capital reduction require RBI approval?
A: A capital reduction that results in the extinguishment of equity or preference shares held by foreign investors constitutes a transfer of shares under FEMA. The pricing must comply with FEMA pricing guidelines (RBI Master Directions on FDI). If the amount paid to foreign investors is less than the FEMA-prescribed floor price (because available cash is insufficient), the company may need to file an explanation with its AD bank. RBI has not prescribed a separate approval for capital reduction, but the AD bank must be notified of the transaction.

Q: Can founders offset the capital gain arising from a wind-down capital reduction against losses from their own business?
A: No. Capital gains are a separate head of income under section 45 and can only be set off against other capital gains (short-term against short-term or long-term; long-term against long-term only). Business losses under section 72 cannot be set off against capital gains.

Q: What is the difference between a capital reduction wind-down and a voluntary liquidation under the IBC?
A: Capital reduction under section 66 of the Companies Act 2013 is a corporate restructuring action, the company continues to exist after the reduction, with a reduced capital base, and is then struck off separately. Voluntary liquidation under the Insolvency and Bankruptcy Code 2016 is a formal insolvency proceeding where a liquidator is appointed, assets are realised, creditors paid, and the company dissolved by the NCLT. Tax treatment of distributions in voluntary liquidation is governed by section 2(22)(c) (deemed dividend on liquidation) rather than section 2(22)(d). The computational principles are similar but the procedural requirements differ significantly.

Q: Is there a minimum cash threshold below which a dividend route is preferable to capital reduction?
A: There is no statutory threshold. The choice depends on whether a dividend is legally permissible (requires distributable profits), whether the liquidation preference waterfall needs to be honoured through a court-sanctioned scheme, and whether the timeline of NCLT proceedings is acceptable. For very small residual cash (under ₹25 lakh) with no VC preference waterfall, a quick dividend followed by a strike-off application may be operationally simpler.

Q: What documentation should be in place before distributing via capital reduction?
A: At minimum: board resolution approving the scheme, shareholder special resolution (three-fourths majority), audited accumulated profits calculation certified by the statutory auditor, NCLT petition and supporting affidavits, creditor settlement proof, TDS computation and TDS payment challans, and Form INC-28 filed with the ROC within 30 days of the NCLT order.

Regulatory references:

• Section 2(22), Income Tax Act 1961 (definition of dividend including deemed dividend)
• Section 2(22)(d), deemed dividend on capital reduction to the extent of accumulated profits
• Section 2(22)(c), deemed dividend on liquidation distributions
• Section 45, Income Tax Act 1961 (capital gains charge)
• Section 48, Income Tax Act 1961 (computation of capital gains)
• Section 55(2)(b), Income Tax Act 1961 (cost of acquisition of shares)
• Section 74, Income Tax Act 1961 (carry-forward and set-off of capital losses)
• Section 112A, Income Tax Act 1961 (LTCG on listed securities, not applicable to unlisted shares but referenced for comparison)
• Section 115A, Income Tax Act 1961 (tax on dividend income of non-residents)
• Section 123, Companies Act 2013 (declaration of dividend)
• Section 66, Companies Act 2013 (reduction of share capital)
• Section 66(1)(a) and 66(1)(b), specific grounds for capital reduction
• Section 68, Companies Act 2013 (buyback of securities, explicitly excluded from section 66)
• Section 194, Income Tax Act 1961 (TDS on dividend including deemed dividend)
• Section 195, Income Tax Act 1961 (TDS on payments to non-residents)
• Section 201, Income Tax Act 1961 (assessee in default for TDS failure)
• Section 271C, Income Tax Act 1961 (penalty for failure to deduct TDS)
• Finance Act 2020, abolition of Dividend Distribution Tax, shift to shareholder-level taxation
• Budget 2024 (Finance Act 2024), revision of LTCG rate on unlisted shares to 12.5% without indexation (effective 23/07/2024)
• NCLT (Procedure for Reduction of Share Capital of Company) Rules 2016
• FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2017, pricing guidelines applicable to foreign shareholders in capital reduction

External sources:

• incometaxindia.gov.in, Income Tax Act 1961 and Finance Act notifications
• mca.gov.in, Companies Act 2013 and NCLT Rules 2016
• rbi.org.in, FEMA Master Directions on Foreign Investment in India