Finance Act, 2013 introduced a special tax on the distributed income of domestic companies from buy-back of shares, similar to the previous dividend distribution tax (DDT) system, which was abolished by the Finance Act, 2020. The 2024 Budget proposes that the sum paid by a domestic company for share buy-backs will be treated as dividend income for shareholders and taxed accordingly. This aligns with the existing regime for dividend taxation. Consequently, shareholders will not be allowed to deduct expenses against this dividend income, and the cost of acquisition of the bought-back shares will result in a capital loss. This loss can offset future capital gains from other share sales. Amendments effective October 1, 2024, will redefine dividends to include buy-back payments and adjust the related tax provisions, ensuring such income is taxed in the hands of recipients. This change aims to standardize the tax treatment of income distribution methods and account for shareholder rights extinguishment during buy-backs.
Budget 2024: Tax on distributed income of domestic company for shares buy-back of shares
Special provisions relating to tax on distributed income of a domestic company from buy-back of shares were introduced by Finance Act, 2013, in line with the then schema of dividend distribution tax. Prior to the amendments made by the Finance Act, 2020, a company had to pay dividend distribution tax (DDT), on the distributed profits by way of dividends in addition to the income-tax chargeable in respect of the total income for any assessment year. DDT was done away with by the Finance Act, 2020.
2. References have been received stating that pay-outs on buy-back of shares should be taxed in hands of recipients, in line with similar regime in place for taxation of dividend.
3. Both dividend as well as buy-back are methods for the company to distribute accumulated reserves and thus ought to be treated similarly. In addition, there is extinguishment of rights for the shareholders who are tendering their shares in the buy-back by domestic company, to the extent of shares bought back by such company from shareholders. The cost of acquisition of such shares also needs to be accounted for in some manner.
4. It is therefore, proposed that, the sum paid by a domestic company for purchase of its own shares shall be treated as dividend in the hands of shareholders, who received payment from such buy-back of shares and shall be charged to income-tax at applicable rates. No deduction for expenses shall be available against such dividend income while determining the income from other sources. The cost of acquisition of the shares which have been bought back would generate a capital loss in the hands of the shareholder as these assets have been extinguished. Therefore when the shareholder has any other capital gain from sale of shares or otherwise subsequently, he would be entitled to claim his original cost of acquisition of all the shares (i.e. the shares earlier bought back plus shares finally sold). It shall be computed as follows:
(i) deeming value of consideration of shares under buy-back (for purposes of computing capital loss) as nil;
(ii) allowing capital loss on buy-back, computed as value of consideration (nil) less cost of acquisition;
(iii) allowing the carry forward of this as capital loss, which may subsequently be set-off against consideration received on sale and thereby reduce the capital gains to this extent.
Example :
| 100 shares bought in 2020 | @Rs. 40/- per share |
| Total cost of acquisition | Rs. 4000/- |
| 20 shares bought back in 2024 | @Rs. 60/- per share |
| Income taxable as deemed dividend | Rs. 1200/- |
| Capital loss on such buyback (Rs. 40 *20) | Rs. 800/- |
| 50 Shares sold in 2025 | @Rs. 70 per share |
| Capital Gain (3500 – 2000) | Rs. 1500 |
| Chargeable capital gain after set off | Rs. 700 |
5. These amendments will take effect from the 1st day of October, 2024, and will accordingly apply to any buy-back of shares that takes place on or after this date.
[Clauses 3, 4, 18, 24, 39 & 52]
Extract of Clause 3 of Finance Bill 2024
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
Clause (22) of the section 2 provides the definition of dividend which, inter alia, does not include any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956.
It is proposed to amend the said clause so as to insert sub-clause (f) therein and omit item (iv) to provide that dividend, inter alia, include any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013.
These amendments will take effect from 1st October, 2024.
Extract of Clause 4 of Finance Bill 2024
Clause 4 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not included in total income.
Clause (34) of section 10 provides exemption to any income arising to an assessee, being a shareholder, on account of buy back of shares by the company as referred to in section 115QA.
It is also proposed to insert a new proviso to clause (34) of the said section so as to provide that this clause shall not apply with respect to any buy back of shares by a company on or after the 1st day of October, 2024.
This amendment will take effect from 1st October, 2024.
Extract of Clause 18 of Finance Bill 2024
Clause 18 of the Bill seeks to amend section 46A of the Income-tax Act relating to capital gains on purchase by company of its own shares or other specified securities.
The said section provides that where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company.
It is proposed to insert a proviso to the said section so as to provide that where the shareholder receives any consideration of the nature referred to in sub-clause (f) of clause (22) of section 2 from any company, in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024, then for the purposes of this section, the value of consideration received by the shareholder shall be deemed to be nil.
This amendment will take effect from 1st October, 2024.
Extract of Clause 24 of Finance Bill 2024
Clause 24 of the Bill seeks to amend section 57 of the Income-tax Act relating to deductions.
Clause (i) of the said section provides that the income chargeable under the head “Income from other sources” in the case of dividends, or interest on securities, shall be computed after making the deductions, of any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee.
It is proposed to amend the said clause to exclude the dividend referred in sub-clause (f) of clause (22) of section 2 for the purposes of the said clause.
It is also proposed to insert a new proviso to the said section to provide that that no deduction shall be allowed in case of dividend income of the nature referred to in sub-clause (f) of clause (22) of section 2.
These amendments will take effect from 1st October, 2024.
Clause (iia) of the said section provides that in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent. of such income or fifteen thousand rupees, whichever is less, shall be made before computing the income chargeable under the head “Income from other sources”.
It is proposed to insert a new proviso in the said clause so as to provide that in a case where income-tax is computed under clause (ii) of sub-section (1A) of section 115BAC of the Act, the provisions of clause (iia) of section 57 shall have effect as if for the words “fifteen thousand rupees”, the words “twenty-five thousand rupees” had been substituted.
This amendment will take effect from 1st April, 2025, and will accordingly apply to assessment year 2025-2026 and subsequent years.
Extract of Clause 39 Finance Bill 2024
Clause 39 of the Bill seeks to amend section 115QA of the Income-tax Act relating to tax on distributed income to shareholders.
Sub-section (1) of the said section, inter alia, provides that notwithstanding anything contained in any other provision of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income-tax at the rate of twenty per cent on the distributed income.
It is proposed to insert a new proviso to the said sub-section so as to provide that the provisions of the said sub-section shall not apply in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024.
This amendment will take effect from 1st October, 2024.
Extract of Clause 52 of Finance Bill 2024
Clause 52 of the Bill seeks to amend section 194 of the Income-tax Act relating to dividends.
The said section, inter alia, provides that the principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rate of ten per cent.
It is proposed to amend the said section so as to make it applicable to for sub-clause (f) of clause (22) of section 2.
This amendment will take effect from 1st October, 2024.
Proposed Amendment to Clause (22) of section 2 of Income Tax Act, 1961 vide Finance Bill, 2024
In clause (22) of section 2 of the Income-tax Act with effect from the 1st day of October, 2024,––
(I) after sub-clause (e) and before the long line, the following sub-clause shall be inserted, namely:––
“(f) any payment by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013;”; 18 of 2013.
(II) in the long line, clause (iv) shall be omitted;
Proposed Amendment to section 46A of Income Tax Act, 1961 vide Finance Bill, 2024
In section 46A of the Income-tax Act, the following proviso shall be inserted before the Explanation, with effect from the 1st day of October, 2024, namely:––
“Provided that where the shareholder receives any consideration of the nature referred to in sub-clause (f) of clause (22) of section 2 from any company, in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024, then for the purposes of this section, the value of consideration received by the shareholder shall be deemed to be nil.”.
Proposed Amendment to section 57 of Income Tax Act, 1961 vide Finance Bill, 2024
In section 57 of the Income-tax Act,––
(i) with effect from the 1st day of October, 2024, ––
(a) in clause (i), after the words “in the case of dividends,”, the words, brackets, letter and figures “other than that referred in sub-clause (f) of clause (22) of section 2” shall be inserted;
(b) after the proviso, the following proviso shall be inserted, namely:––
“Provided further that no deduction shall be allowed in case of dividend income of the nature referred to in sub-clause (f) of clause (22) of section 2.”;
Proposed Amendment to section 115QA of Income Tax Act, 1961 vide Finance Bill, 2024
In section 115QA of the Income-tax Act, in sub-section (1), after the proviso and before the Explanation, the following proviso shall be inserted with effect from the 1st day of October, 2024, namely:––
“Provided further that the provisions of this sub-section shall not apply in respect of any buy-back of shares, that takes place on or after the 1st day of October, 2024.”.
Proposed Amendment to section 194 of Income Tax Act, 1961 vide Finance Bill, 2024
In section 194 of the Income-tax Act, after the word, brackets and letter “sub-clause (e)”, the words, brackets and letter “or sub-clause (f)” shall be inserted with effect from the 1st day of October, 2024.
