1. Introduction
With the increase in cross-border investment structures and global portfolio diversification, Indian residents and non-residents alike frequently hold shares in foreign companies. In this context, one recurring commercial arrangement is the buyback or repurchase of shares by a foreign company from its existing shareholders. Such transactions typically involve the company offering to buy back its own shares, often at a premium, thereby returning capital to shareholders and reducing its outstanding share capital.
While the transaction appears straightforward from a commercial perspective, it raises important questions under Indian Income Tax law, particularly when the shareholder is a non-resident. The primary issue is whether capital gains arising from such a buyback from shares of a foreign company is to be chargeable to tax in India.
Although the Income-tax Act, 1961 lays down clear principles on the scope of income and source-based taxation, the application of these provisions to offshore buyback transactions appears to have received limited direct judicial examination so far, and thus, may give rise to interpretational uncertainties in specific fact situations. This article analyses the Indian tax implications of such transactions in the hands of non-resident shareholders, with particular reference to the statutory framework and relevant judicial guidance.
How a Buyback Works – A Brief Background
A buyback (also known as a share repurchase) is a corporate action where a company offers to purchase its own outstanding shares from existing shareholders. This can be done through open market purchases, tender offers, or private arrangements, depending on applicable corporate laws and shareholder approvals.
The fundamental objectives of a buyback may include:
- Returning surplus cash to shareholders,
- Optimizing capital structure by reducing equity,
- Enhancing financial ratios such as Earnings Per Share (EPS) and Return on Equity (ROE),
- Increasing promoter holding by reducing public float.
Upon completion of the buyback, the repurchased shares are usually cancelled, which results in a reduction of the company’s paid-up capital and the total number of outstanding shares.
From the shareholder’s perspective, a buyback typically results in the transfer of shares back to the company in exchange for consideration, giving rise to a potential capital gains tax event, depending on the jurisdiction and tax status of the shareholder.
In the case of foreign company buybacks, if the shareholder is a non-resident and the transaction occurs outside India, it gives rise to important questions of source-based taxation and situs of the capital asset, which are crucial in determining the taxability of capital gains under Indian tax law.
2. Components Determining Taxability of a Person in India
Before analyzing the provisions, it is essential to understand the broad framework that governs taxability under the Indian Income-tax Act, 1961. The primary components are:
1. Residential Status: As per Section 6, the residential status of a person is determined, which in turn affects the scope of income chargeable to tax under Section 5 of the Income-tax Act, 1961.
2. Scope of Total Income: Once the residential status is determined, Section 5 defines the scope of total income which is taxable in India.
3. Components Determining Taxability of Capital Gains
In addition to the person’s residential status, the following factors influence whether capital gains are taxable in India:
Situs of the Capital Asset: Whether the capital asset is situated in India or outside India.
Place of Receipt or Accrual: Whether the capital gains are received or deemed to be received in India, or accrue or are deemed to accrue in India.
Nature of the Transfer: Whether the transfer falls within the scope of charge under Section 45.
4. Hypothetical Facts for Context
- An Indian citizen who is holding shares of a company based in Singapore say KZE Pte. Ltd (“The foreign company”). The company offer to buyback the shares. The Indian shareholder participates in the buyback scheme and he sold his shares.
- He is planning to leave India on 31st May 2025 and subsequently he will not return for rest of the year to India.
- He will receive the sales consideration in his foreign bank account.
5. Residential Status under Section 6(1)
Section 6(1) of the Income-tax Act defines an individual as a resident in India if:
(a) He/she stays in India for 182 days or more during the relevant financial year; or
(b) He/she stays in India for 60 days or more during the year and 365 days or more in the preceding 4 years.
However, for Indian citizens leaving India for employment abroad, only the 182-days threshold applies.
6. Scope of Total Income – Section 5(2)
As per Section 5(2), the total income of a non-resident includes only:
- Income received or deemed to be received in India; or
- Income that accrues/arises or is deemed to accrue/arise in India.
7. Applicability of Section 9(1)(i)
Section 9(1)(i) deems income to accrue or arise in India if it is:
- Through or from any business connection in India;
- Through or from any property, asset or source of income in India;
- Through the transfer of a capital asset situated in India.
Explanation 5 to this clause was inserted to address indirect transfers (e.g., in Vodafone case), stating that shares in a foreign company shall be deemed to be situated in India if they derive substantial value from Indian assets.
If the foreign company does not derive substantial value from assets located in India, then such shares are not considered situated in India, and capital gains on their transfer do not accrue or arise in India.
8. Applicability of Sections 45 and 46A
Section 45 deals with capital gains tax liability, while Section 46A covers repurchase of shares by companies.
However, in the absence of any taxable nexus under Section 5(2) or 9(1)(i), the charge under Section 45 or 46A does not arise. Consequently, the computational provisions of Section 48, tax rate provisions under Section 112, or exemptions under Sections 54F/54EE are inapplicable.
9. Applying the Law to the Hypothetical Case
Based on the facts provided:
- The individual is a non-resident for FY 2025-26, as he does not meet the 182-day threshold for residency under Section 6(1).
- According to section 5(2) the only income which is chargeable to tax in India in case of Non-resident is the income which is received/deemed to be received in India or accrue/arise or deemed to accrue/arise in India. In the present case, there is no doubt on the receipts part as it is clearly considered to be received outside India, as it will be credited in a foreign bank account.
- Now the question arises, how to determine whether the income accrue or arise in India or Not? And that’s the complicated part. For that matter we have to find out whether the situs of capital asset is in India or outside India. Let’s look at the below case laws:
1.Vodafone International Holdings B.V. v. Union of India (2012) 341 ITR 1 (SC)
[Refer para 82]:
The Supreme Court held that the situs of shares in a company is where the company is incorporated and where its share register is maintained, unless statutorily provided otherwise. Specifically, it observed:
“The shares are situated at the place where the company is incorporated and where the share register is maintained…”
– para 82
Therefore, in the absence of statutory fiction to the contrary, the situs of shares in a foreign company lies outside India.
2. Credit Agricole Indosuez v. JCIT [2007] 14 SOT 246 (Mumbai ITAT)
The Tribunal held that interest income on funds deposited outside India with a foreign bank did not accrue or arise in India, as the right to receive such income arose outside India. This reinforces the principle that the location of the source of income and not the taxpayer’s bookkeeping practices is determinative for accrual purposes:
“If such event has taken place outside India, then how that income would be taxable in India?” – para 14
Applied to the current context, since the repurchase transaction and receipt of consideration happen abroad, and the underlying shares are foreign, the capital gains do not accrue or arise in India.
3. Nikesh Arora v. DCIT [2024] 165 taxmann.com 195 (Delhi ITAT)
In this case, the ITAT explicitly held that the situs of the capital asset—namely, certain rights and interests in Indian shares acquired by the assessee in the USA—was outside India, and thus capital gains arising from their transfer could not be taxed in India under Section 9(1)(i):
“…situs of capital asset in nature of rights and interests was in USA and not located in India… income derived from transfer of such capital asset would not be taxable in India.” – para 40
This case supports the proposition that even intangible capital assets, if acquired and held abroad, do not lead to Indian tax exposure unless there exists a direct nexus to India under Section 9.
Given these facts:
Given the above facts and legal framework, it is evident that the income arising from the repurchase of foreign shares is neither received nor deemed to be received in India, as the consideration is credited directly to the non-resident’s foreign bank account. Further, the capital gains do not accrue or arise in India, nor are they deemed to accrue or arise in India, since the underlying shares pertain to a foreign company whose incorporation and share register are maintained outside India. The situs of such shares, as clarified by the Supreme Court in Vodafone International Holdings B.V. v. Union of India, lies outside India. Therefore, no taxable nexus is established under Section 5(2) of the Income-tax Act, 1961, which governs the scope of income in the case of a non-resident, or under Section 9(1)(i), which deals with deemed accrual of income in India.
Consequently, since the income is not chargeable to tax in India, the provisions relating to capital gains—Section 45, which creates the charging mechanism, and Section 46A, which applies specifically to repurchase of shares by a company—do not get triggered. In the absence of a taxable event under the charging or deeming provisions, the computational and concessional provisions under Sections 48, 112, or exemption sections like 54F or 54EE become redundant. Thus, under a plain and holistic reading of the Income-tax Act, there exists no Indian tax liability on such capital gains in the hands of the non-resident individual.
10. Potential Risk Areas and Litigation Exposure
- While the statutory position appears sound, judicial precedent on this exact issue (repurchase of foreign shares by a foreign company held by an NRI) is limited.
- The assessing officer may seek to explore whether Explanation 5 applies or whether there is constructive receipt in India.
- Hence, litigation risk cannot be fully ruled out.
Conclusion
Where a non-resident individual receives consideration from the repurchase of shares by a foreign company, and such shares are not deemed to be situated in India, the capital gains should not be chargeable to tax in India. This conclusion flows from a combined reading of Sections 5(2) and 9(1)(i) and various judicial precedents.
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