Income Tax Department
Ministry of Finance, Government of India
Tax on Distributed Income
Tax on Buyback of Shares (from 01-10-2024)
Introduction
With effect from 01-10-2024, when a domestic company buys back its shares, the consideration paid is treated as deemed dividend under Section 2(22)(f) and taxed under “Income from Other Sources” in the hands of shareholders. The cost of acquisition of shares results in a capital or business loss, depending on the asset type which shall be allowed to be set off or carried forward as per the extant provisions.
Tax Implications from 01-10-2024
Buy-back consideration
Consideration received by a shareholder on the buyback of shares shall be treated as a deemed dividend under Section 2(2)(f).
Since the consideration received on buyback is already taxed as a deemed dividend in the hands of the shareholder, computing income under the head “Capital Gains” or “Business” would result in a loss. This is because the acquisition or purchase cost of the shares would effectively become a loss.
Deemed Dividend Taxation
- Resident Shareholders: Taxable at normal rates under “Income from Other Sources.”
- Non-Resident Shareholders: Taxable at special rates, subject to provisions of DTAA.
- Tax Deduction: Tax withheld under Section 194 or 195, depending on shareholder residency.
Capital Gains
- Full Value Consideration: Deemed as nil for shares bought back under Section 2(22)(f).
- Capital Loss: Equal to acquisition cost; eligible for set-off and carry-forward per capital gains rules.
Business Income
- If shares are stock-in-trade, the buyback amount is treated as deemed dividend, creating a business loss equal to purchase cost.
- Losses are adjusted per provisions of “Profits and Gains of Business or Profession.”
Examples
- Capital Gains Computation
If 2,000 shares bought at Rs. 20 each are bought back at Rs. 50 per share, Rs. 1,00,000 is taxed as dividend. The capital loss of Rs. 40,000 (cost of acquisition) can be set off as per extant provisions.
- Business Income Computation
For a trader holding 10,000 shares bought at Rs. 10 each, if 6,000 shares are bought back at Rs. 25 each, the dividend income is Rs. 1,50,000. The business loss is Rs. 60,000 which can set-off as per extant provisions
Tax on Buyback of Shares (Upto 30-09-2024)
Introduction
Domestic companies must pay tax at 20% (plus surcharge and cess) on distributed income arising from buybacks conducted on or before 30-09-2024. Distributed income is the consideration paid for buyback reduced by the amount received upon share issuance. Shareholders are exempt from tax on such consideration.
Liability to Pay Tax
Domestic companies are liable for the tax unless the buyback is of listed shares with a public announcement made before 05-07-2019. For foreign companies, shareholders pay capital gains tax on income from such transactions under Section 46A.
Tax Rate and Payment
- Effective tax rate: 23.296%.
- Payment due: Within 14 days of buyback consideration.
- The tax paid is final and not creditable. No deduction for distributed income or tax paid is allowed.
Consequences of Default
- Interest: 1% per month for late payment.
- Assessee-in-default: The company and its principal officer are liable for recovery under tax laws.
Calculation of Distributed Income
Distributed income = Buyback consideration – Amount received on share issuance.
Specific rules apply for shares issued under various circumstances (e.g., ESOPs, amalgamation, demerger, etc.), including using the fair market value or subscription price as per Rule 40BB.
