Taxability of Share Buybacks in India
A share buyback is a process where a company buys back its own shares from existing shareholders at a predetermined price. Understanding the taxability of buyback of shares is essential, as the company conducts this through a tender offer, meaning shareholders voluntarily offer their shares to the company in exchange for cash.
The Finance Act (No. 2), 2024 abolished the previous 20% buyback distribution tax (BDT) levied on companies and replaced it with a dividend-based taxation model for shareholders. The key principle underlying this change is treating buyback proceeds as deemed dividend income in the hands of shareholders, making them subject to tax under the key principle of buyback of shares taxability at the shareholder’s applicable income tax slab rate.
Key Dates:
- October 1, 2024: New buyback tax regime became effective
- September 30, 2024: Last date of old buyback tax regime
- August 2024: Finance (No. 2) Act, 2024 was passed by Parliament
Tax Treatment Under the Old Regime (Until September 30, 2024)
Who Paid the Tax?
The company was solely responsible for paying the buyback tax, not the shareholders.
Tax Rate and Calculation
The old regime imposed a special buyback distribution tax under Section 115QA of the Income Tax Act, 1961, at the following rates:
- Basic tax rate: 20%
- Surcharge: 12% on the tax amount
- Health and Education Cess: 4% on the combined tax and surcharge
- Effective total rate: 23.296%
The company had to pay the buyback tax within 14 days from the date of paying the amount to shareholders. If the company failed to pay by the due date, simple interest at 1% per month was applicable on the unpaid amount.
What Amount Did the Company Pay Tax On?
The company calculated tax on the ‘distributed income,’ which means the difference between the buyback price and the original issue price of the shares.
Example of Old Regime Taxation:
Suppose Company ABC conducts a share buyback with the following details:
- Number of shares: 1,000
- Buyback price: ₹650 per share
- Original issue price: ₹50 per share
Calculation:
- Total buyback amount: 1,000 × ₹650 = ₹6,50,000
- Original issue price: 1,000 × ₹50 = ₹50,000
- Distributed income: ₹6,50,000 – ₹50,000 = ₹6,00,000
- Tax payable by company: ₹6,00,000 × 23.296% = ₹1,39,776
Shareholder Tax Liability
Shareholders paid absolutely no tax on the buyback amount. This was because the Income Tax Act explicitly exempted buyback proceeds in the hands of shareholders under Section 10(34A). Since the company already paid the buyback distribution tax, shareholders received the entire buyback amount tax-free.
Tax Treatment Under the New Regime (From October 1, 2024 Onwards)
Deemed Dividend Income:
The entire amount received by a shareholder from a buyback is now classified as dividend income under Section 2(22)(f) of the Income Tax Act. This is a critical distinction in the buyback of shares taxability from the previous regime—shareholders now pay tax on the full buyback amount, not just the gain.
Applicable Tax Rates:
Shareholders must declare buyback proceeds as part of their total income and pay tax according to their individual income-tax slab. Consequently, high-income earners in the 30% slab face a significantly higher tax burden. Moreover, shareholders must understand the taxability of buybacks to manage their finances effectively, especially when compared to the earlier regime. For instance, if a shareholder in the 30% slab receives ₹10,000 from a buyback, they would owe ₹3,000 in tax (before surcharge and cess), whereas long-term capital gains on the same amount would have been taxed at only 12.5%.
No Deductions Allowed:
Unlike other forms of income, shareholders cannot claim any deductions or expenses against the buyback consideration. This restriction further increases the effective tax burden compared to scenarios where investors could offset transaction costs.
Tax Deduction at Source (TDS)
Companies performing buybacks are now required to deduct tax at source under Section 194:
- Resident shareholders: 10% TDS is deducted
- Non-resident shareholders: 20% TDS or rates specified under applicable tax treaties
Important Exemption:
No TDS is deducted if the total dividends and buyback consideration received by a resident individual during the financial year does not exceed ₹10,000. Additionally, shareholders may be exempt from TDS based on eligibility declarations and appropriate documentation, such as certificates confirming their tax liability is nil or that their income falls within exempt limits. These measures help shareholders navigate buyback of shares taxability more effectively.
The shareholder now bears the entire tax burden. The company is no longer liable to pay any buyback tax.
Capital Loss Treatment
A unique aspect of the new regime is the split tax treatment whereby buyback proceeds are taxed as dividend income while the cost of shares creates a capital loss:
Deemed Capital Loss:
When the company buys back shares, the taxpayer treats the cost of acquiring those shares as a capital loss. For capital gains calculations, the law deems the sale consideration to be nil, which creates a loss equal to the original cost.
Limitation on Loss Set-off:
The critical constraint is that this capital loss can only be set off against other capital gains from the sale of securities or other capital assets. It cannot be set off against the dividend income received from the buyback itself. This means a shareholder cannot use the capital loss to reduce the tax on the deemed dividend.
Loss Carry-Forward:
The capital loss can be carried forward for up to eight assessment years, allowing shareholders to utilize the loss in future years if they realize other capital gains. However, if a shareholder has no other capital gains in subsequent years, the benefit of this loss may be permanently lost. Understanding the limitations imposed by the buyback of shares taxability is crucial for financial planning.
Comparison: Pre-October 1, 2024 vs. Current Regime
| Aspect | Pre-October 1, 2024 | Post-October 1, 2024 |
| Tax Payer | Company (20% + 12% surcharge + 4% cess) | Shareholder (at slab rate) |
| Tax Base | Distributed income (buyback price minus issue price) | Entire buyback amount |
| Shareholder Tax | Exempt under Section 10(34A) | Taxed as deemed dividend |
| Capital Gains Treatment | Not applicable | Cost treated as capital loss (can offset other gains) |
| TDS | Company paid tax only | 10% TDS for residents, 20% for non-residents |
Tax Filing Requirements
From the 2025–26 assessment year onward, taxpayers must report buyback proceeds as deemed dividends under ‘Income from Other Sources’ in the relevant income tax return (ITR) forms. They must also show the cost of the shares bought back in the capital gains schedule as generating zero sale proceeds, which allows them to claim the cost as a capital loss for future set-off in line with buyback taxability rules.
