In the transformative world of Indian corporate finance, Buyback of shares has emerged as a strategic instrument used by companies to manage capital efficiently. Buyback of shares involve a company repurchasing its own shares from shareholders, resulting in a reduction of the total number of outstanding shares. This, in turn, can help to :
a) Improve Earning per Share
b) Strategically increase promoter’s shareholding
c) Improve return on capital
d) Enhance consolidation of Stake in Company
e) Achieve optimum capital structure and likewise.
Due to this, it is vital to decode how Taxation on Buyback of shares for Domestic Company including listed as well as Unlisted companies works today.
A) Buyback of shares- Tax Provisions Applicable until 30th September 2024
1. Tax implications for the Company
As per Section 115 QA of the Income Tax Act 1961,Domestic Company shall pay tax effectively @23.296% (consisting of 20% tax, 12% surcharge, and 4% cess) on Distributed income within 14 days from date of Distribution of income. For this purpose Distributed income means the consideration paid by the company on buy-back of shares as reduced by the amount, which was received by the company for issue of such shares.
2. Tax implications for the shareholders
The amount received by shareholders on Buyback of shares shall be exempt u/s 10(34A) of the Income tax Act, 1961.
B) Buyback of shares- Tax provisions applicable w.e.f 1st October 2024
1. Tax implications for the Company
Pursuant to the amendment under Union Budget 2024, tax on buyback of shares transactions executed on or after 1st October 2024 shall be levied in the hands of shareholders, and not on the company.
2. Tax implications for the shareholders
a) As per Section 2(22)(f) of the Income tax Act 1961, Any payment by company on buy back of shares shall be treated as deemed dividend in hands of shareholder and it is taxable as per normal tax rate under the head Income from other sources.
b) The cost of shares purchased should be treated as capital loss under the head Capital Gain.
c) While computing capital gain/loss, we should take full value of consideration as always Nil minus cost of acquisition of share.
d) The Period of holding shall be Date of Acquisition of shares till Date of Buy Back of shares.
e) The Capital loss derived from computation of Capital Gain/loss shall be set off only against Capital Gain and be carried forward and set off for Eight years.
The amendment introduced in Union Budget 2024, shifting the tax liability on Buyback of shares from companies to shareholders, seeks to harmonize the treatment of profit distribution with the post-Dividend distribution tax regime. This move enhances tax equity by aligning the burden with the recipient’s income capacity, curtails tax arbitrage previously exploited through buybacks, and brings India in line with global standards.Moreover, shareholder-level taxation ensures greater transparency, improves traceability of high-value transactions, and reinforces the principles of progressive taxation and compliance accountability.
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