The Indian secondary market, often referred to as the share market, witnessed a wave of buyback offers through FY 2023–24. For many cash-rich corporations, share buybacks had become a preferred mechanism to reward investors. This gained further attraction after the abolition of Section 10(34) of the Income Tax Act, which previously made dividends tax-free in the hands of shareholders. With dividends becoming fully taxable, buybacks offered a relatively tax-efficient alternative.
However, the Finance Act, 2024 brought a major shift. Effective from July 2024, the definition of “dividend” under Section 2(22)(f) of the Income Tax Act was expanded to include consideration paid by companies during buybacks. This single amendment effectively removed the tax arbitrage that investors previously enjoyed on buyback transactions. Corresponding Section 115QA was also abolished which made the announcing dividend a taxable event in hands of the issuing company.
Now, in this changed landscape, another significant buyback is set to attract market attention. Infosys Limited has announced a buyback of approximately 2.5% of its equity shares at a price of Rs. 1,800 per share, effective November 14, 2025. Interestingly, just a week prior, the market price hovered around Rs. 1,460 per share—creating a tempting gap for investors, including high-net-worth individuals (HNIs), seeking short-term opportunities.
Tax Implications: The Infosys Buyback Case
The current tax treatment of buyback proceeds, in light of the July 2024 amendment, can be illustrated using the Infosys case:
- Tax on Buyback Proceeds:
The consideration received under buyback is now taxable in the hands of the shareholder at their applicable income-tax slab rate, without any deduction for the cost of acquisition. Depending on the taxpayer’s slab, the effective tax could range from nil (for those below the basic exemption limit) up to approximately Rs. 650 per share.
- Treatment of Cost of Shares Offered for Buyback:
Since the extinguishment of rights in shares constitutes a “transfer” under Section 2(47), the shareholder may recognize a capital loss (short-term or long-term, depending on the holding period). Such loss can be adjusted against other capital gains or carried forward for set-off in future years, as per the provisions of the Act.
Alternate Route: Selling Shares on the Open Market
Alternatively, investors may choose to sell their shares in the open market rather than participate in the buyback. In such cases, the transaction will attract:
- Long-Term Capital Gains (LTCG) tax at 12.5% (plus applicable surcharge and cess), or
- Short-Term Capital Gains (STCG) tax at 20% (plus applicable surcharge and cess),
subject to the holding period and other conditions under the Act. Additionally, the exemption for the first Rs. 1.25 lakh of LTCG on listed equity shares (with STT paid) remains available.
Relevant Provisions of the Income Tax Act
For detailed reference, the following sections are pertinent:
- Section 2(14) – Definition of Capital Asset
- Section 2(42A) – Definition of Short-Term Capital Asset
- Section 2(42B) – Definition of Short-Term Capital Gain
- Section 2(47) – Definition of Transfer
- Section 45 – Capital Gains
- Section 111A – Tax on Short-Term Capital Gains on listed equity (with STT)
- Section 112A – Tax on Long-Term Capital Gains on listed equity (with STT)
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