Income Tax on Buyback of Shares: All You Need to Know

Income Tax on Buyback of Shares: All You Need to Know. Buyback of shares, also known as share repurchase, is a corporate action where a company buys back its own issued shares from existing shareholders. This process allows companies to regain ownership, restructure capital, or improve key financial ratios. With changing tax laws, especially the amendments announced in Budget 2024, it is essential to understand how Income Tax on Buyback of Shares applies, who bears the tax burden, and what provisions are relevant for listed and unlisted companies.
What is a Buyback of Shares?
Buyback of shares is a corporate action taken by companies to repurchase their own issued equity from shareholders. The repurchase is generally done at the prevailing market price or sometimes even at a premium. Once bought back, these shares are extinguished, reducing the number of outstanding shares in the market. This process can help companies consolidate ownership, increase shareholder value, or manage excess liquidity.
Why Do Companies Buyback Shares?
There are several strategic and financial reasons why companies opt for buybacks. One of the main reasons is consolidation of ownership. Companies with a broad shareholder base may prefer tighter control by buying back shares. Another reason is to correct undervaluation. If a company believes its shares are undervalued in the market, a buyback can signal confidence and help boost the share price.
Buybacks also enhance financial ratios, such as Earnings Per Share (EPS), by reducing the number of outstanding shares. Furthermore, promoters may use buybacks to increase their stake in the company without issuing new shares. Overall, buybacks are often seen as a sign of a financially healthy company with surplus funds.
Income Tax on Buyback of Shares: Past vs Present
Under the earlier tax regime, especially after the Finance Act, 2013, tax on buyback was introduced through Section 115QA of the Income Tax Act. Initially, this applied only to unlisted companies, but later the scope was extended to listed companies with effect from 5th July 2019 via Finance Act (No. 2), 2019. Under this section, companies conducting a buyback were liable to pay a tax on the distributed income.
The rationale behind this was to curb tax avoidance. Many companies, especially unlisted ones, preferred buybacks over dividends to avoid Dividend Distribution Tax (DDT). The buyback income was treated as capital gains for shareholders, which often attracted lower tax or even zero tax due to the basic exemption limit.
Budget 2024: Big Change in Buyback Taxation
In a major shift announced during the Budget 2024, it was proposed that from 1st October 2024 onwards, companies would no longer be liable to pay tax on buybacks. Instead, the tax liability would shift to shareholders, and the buyback proceeds would be treated as deemed dividend under the newly introduced Section 2(22)(f) of the Income Tax Act.
This change is made to bring buyback taxation in line with dividend taxation, where the shareholder is taxed and not the company. As a result, for buybacks made on or after 1st October 2024, shareholders must pay tax on the total amount received from the buyback.
Section 2(22)(f): Taxability in Shareholder's Hands
The newly inserted Section 2(22)(f) now defines that any sum received by a shareholder under a buyback of shares will be treated as dividend income. This income will be taxable as per the applicable income tax slab rate of the shareholder. It is important to note that:

The cost of acquisition of the shares offered under buyback will not be allowed as a deduction from such dividend income.

However, the said cost will be treated as deemed capital loss.

This deemed loss can be carried forward and set off against future capital gains for up to eight years.

Section 115QA: Applicability till 30th September 2024
Till 30th September 2024, Section 115QA will remain in effect. This means any buyback completed on or before this date will be taxed in the hands of the company. Under this section:

The company is liable to pay buyback tax at an effective rate of 23.296% (20% tax + 12% surcharge + 4% cess).

Shareholders are not liable to pay any tax on the amount received from such buyback.

The company must pay this tax within 14 days of making the payment to shareholders.

How is Tax Calculated on Buyback of Shares?
The tax on buyback is calculated based on the distributed income. This is the difference between the amount paid by the company for buying back the shares and the issue price of those shares.
Formula: Distributed Income = Buyback Price - Issue Price
For instance, if a company issued shares at Rs. 50 and repurchased them at Rs. 650, the distributed income is Rs. 600 per share. For 1,000 shares, this would be Rs. 6,00,000, and the buyback tax would be Rs. 6,00,000 x 23.296% = Rs. 1,39,776.
This tax has to be paid even if the shares were traded multiple times, as long as the issue price is identifiable.
Buyback by Listed Companies: Then and Now
Initially, listed companies were not covered under Section 115QA. This led to a practice where companies avoided DDT by distributing money to shareholders via buybacks. Realising this, the government extended Section 115QA to listed companies from 5th July 2019.
Now, with Budget 2024’s amendment, the tax responsibility will shift back to the shareholder, similar to how dividends are taxed. This will apply to all buybacks made on or after 1st October 2024.
Buyback by Unlisted Companies: Timeline of Changes
Unlisted companies have been subject to Section 115QA since its introduction in 2013. These companies often used buybacks to avoid DDT. The provision ensured that the tax was collected at the company level, closing any loopholes.
From 1st October 2024, unlisted companies will also fall under the new system where shareholders pay tax on buyback proceeds as dividend income.
Cost of Acquisition and Capital Loss Adjustment
A key concern for shareholders is the non-allowance of acquisition cost as a deduction from buyback proceeds. However, the same cost is not wasted. It can be used as a deemed capital loss, which can be adjusted against future capital gains.
This means, although the entire buyback amount is taxed as dividend, the investment value is not lost, and shareholders can utilise the capital loss for tax planning in upcoming years.
Due Date for Buyback Tax Payment
For companies buying back shares before 1st October 2024, the buyback tax must be paid within 14 days from the date of payment made to shareholders. If the company fails to pay the tax within this period, simple interest at 1% per month is charged on the unpaid amount till the date of payment.
Budget 2025 Highlights: Impact on Shareholders
As per Budget 2025:

Income up to Rs. 12.75 lakh is now tax-free for individuals under the new tax regime.

Buyback proceeds received after 1st October 2024 will be taxed as dividend income.

Shareholders should assess their slab and total income while calculating tax liability from buybacks.

A higher Section 87A rebate of up to Rs. 12 lakh makes the new tax regime more beneficial for the middle class.

Examples for Clarity
Example 1: Buyback Before 1st October 2024
A company repurchases 500 shares at Rs. 650 each. The original issue price was Rs. 50.

Distributed Income = (Rs. 650 - Rs. 50) x 500 = Rs. 3,00,000

Buyback Tax @ 23.296% = Rs. 69,888 (paid by the company)

Shareholder pays no tax.

Example 2: Buyback After 1st October 2024
Same example, but the buyback happens in November 2024.

Total amount received by shareholder = Rs. 650 x 500 = Rs. 3,25,000

This amount is taxed as dividend income under Section 2(22)(f)

No deduction for acquisition cost.

Rs. 25,000 (i.e., Rs. 650 - Rs. 50 = Rs. 600 x 500) is deemed capital loss, which can be carried forward for 8 years.

Conclusion
With the new rule applicable from October 2024, the Income Tax on Buyback of Shares now shifts the burden from companies to shareholders. It becomes important for investors to plan their income and capital gains wisely. Companies also need to consider alternative strategies for returning value to shareholders. For advisory and compliance support, reach out to tax consultants like Compliance Calendar LLP to stay updated and avoid non-compliance.
Email: info@ccoffice.in
Call/Whatsapp: +91 9988424211
Frequently Asked Questions (FAQs)
Q1. Is income from share buyback taxable for the shareholder? 
Ans. If the buyback is made after 1st October 2024, yes. It is taxable as dividend income under Section 2(22)(f).
Q2. What happens to the cost of acquisition in buyback? 
Ans. The cost is not deductible but is considered a deemed capital loss that can be adjusted in the future.
Q3. Is buyback tax applicable to both listed and unlisted companies? 
Ans. Yes, as per the current regime till 30th September 2024. Post that, both listed and unlisted companies will follow the new rule where tax is levied on shareholders.
Q4. How long can capital loss from buyback be carried forward? 
Ans. Up to 8 assessment years.
Q5. What is the tax rate under Section 115QA? 
Ans. Effective rate is 23.296%, which includes 20% base rate + surcharge + cess.
Q6. Will TDS be applicable on buyback proceeds post 1st October 2024? 
Ans. Yes, since the amount is deemed as dividend, normal TDS provisions under dividend income may apply.

Buyback of shares, also known as share repurchase, is a corporate action where a company buys back its own issued shares from existing shareholders. This process allows companies to regain ownership, restructure capital, or improve key financial ratios. With changing tax laws, especially the amendments announced in Budget 2024, it is essential to understand how Income Tax on Buyback of Shares applies, who bears the tax burden, and what provisions are relevant for listed and unlisted companies.

What is a Buyback of Shares?

Buyback of shares is a corporate action taken by companies to repurchase their own issued equity from shareholders. The repurchase is generally done at the prevailing market price or sometimes even at a premium. Once bought back, these shares are extinguished, reducing the number of outstanding shares in the market. This process can help companies consolidate ownership, increase shareholder value, or manage excess liquidity.

Why Do Companies Buyback Shares?

There are several strategic and financial reasons why companies opt for buybacks. One of the main reasons is consolidation of ownership. Companies with a broad shareholder base may prefer tighter control by buying back shares. Another reason is to correct undervaluation. If a company believes its shares are undervalued in the market, a buyback can signal confidence and help boost the share price.

Buybacks also enhance financial ratios, such as Earnings Per Share (EPS), by reducing the number of outstanding shares. Furthermore, promoters may use buybacks to increase their stake in the company without issuing new shares. Overall, buybacks are often seen as a sign of a financially healthy company with surplus funds.

Income Tax on Buyback of Shares: Past vs Present

Under the earlier tax regime, especially after the Finance Act, 2013, tax on buyback was introduced through Section 115QA of the Income Tax Act. Initially, this applied only to unlisted companies, but later the scope was extended to listed companies with effect from 5th July 2019 via Finance Act (No. 2), 2019. Under this section, companies conducting a buyback were liable to pay a tax on the distributed income.

The rationale behind this was to curb tax avoidance. Many companies, especially unlisted ones, preferred buybacks over dividends to avoid Dividend Distribution Tax (DDT). The buyback income was treated as capital gains for shareholders, which often attracted lower tax or even zero tax due to the basic exemption limit.

Budget 2024: Big Change in Buyback Taxation

In a major shift announced during the Budget 2024, it was proposed that from 1st October 2024 onwards, companies would no longer be liable to pay tax on buybacks. Instead, the tax liability would shift to shareholders, and the buyback proceeds would be treated as deemed dividend under the newly introduced Section 2(22)(f) of the Income Tax Act.

This change is made to bring buyback taxation in line with dividend taxation, where the shareholder is taxed and not the company. As a result, for buybacks made on or after 1st October 2024, shareholders must pay tax on the total amount received from the buyback.

Section 2(22)(f): Taxability in Shareholder's Hands

The newly inserted Section 2(22)(f) now defines that any sum received by a shareholder under a buyback of shares will be treated as dividend income. This income will be taxable as per the applicable income tax slab rate of the shareholder. It is important to note that:

The cost of acquisition of the shares offered under buyback will not be allowed as a deduction from such dividend income.
However, the said cost will be treated as deemed capital loss.
This deemed loss can be carried forward and set off against future capital gains for up to eight years.

Section 115QA: Applicability till 30th September 2024

Till 30th September 2024, Section 115QA will remain in effect. This means any buyback completed on or before this date will be taxed in the hands of the company. Under this section:

The company is liable to pay buyback tax at an effective rate of 23.296% (20% tax + 12% surcharge + 4% cess).
Shareholders are not liable to pay any tax on the amount received from such buyback.
The company must pay this tax within 14 days of making the payment to shareholders.

How is Tax Calculated on Buyback of Shares?

The tax on buyback is calculated based on the distributed income. This is the difference between the amount paid by the company for buying back the shares and the issue price of those shares.

Formula: Distributed Income = Buyback Price - Issue Price

For instance, if a company issued shares at Rs. 50 and repurchased them at Rs. 650, the distributed income is Rs. 600 per share. For 1,000 shares, this would be Rs. 6,00,000, and the buyback tax would be Rs. 6,00,000 x 23.296% = Rs. 1,39,776.

This tax has to be paid even if the shares were traded multiple times, as long as the issue price is identifiable.

Buyback by Listed Companies: Then and Now

Initially, listed companies were not covered under Section 115QA. This led to a practice where companies avoided DDT by distributing money to shareholders via buybacks. Realising this, the government extended Section 115QA to listed companies from 5th July 2019.

Now, with Budget 2024’s amendment, the tax responsibility will shift back to the shareholder, similar to how dividends are taxed. This will apply to all buybacks made on or after 1st October 2024.

Buyback by Unlisted Companies: Timeline of Changes

Unlisted companies have been subject to Section 115QA since its introduction in 2013. These companies often used buybacks to avoid DDT. The provision ensured that the tax was collected at the company level, closing any loopholes.

From 1st October 2024, unlisted companies will also fall under the new system where shareholders pay tax on buyback proceeds as dividend income.

Cost of Acquisition and Capital Loss Adjustment

A key concern for shareholders is the non-allowance of acquisition cost as a deduction from buyback proceeds. However, the same cost is not wasted. It can be used as a deemed capital loss, which can be adjusted against future capital gains.

This means, although the entire buyback amount is taxed as dividend, the investment value is not lost, and shareholders can utilise the capital loss for tax planning in upcoming years.

Due Date for Buyback Tax Payment

For companies buying back shares before 1st October 2024, the buyback tax must be paid within 14 days from the date of payment made to shareholders. If the company fails to pay the tax within this period, simple interest at 1% per month is charged on the unpaid amount till the date of payment.

Budget 2025 Highlights: Impact on Shareholders

As per Budget 2025:

Income up to Rs. 12.75 lakh is now tax-free for individuals under the new tax regime.
Buyback proceeds received after 1st October 2024 will be taxed as dividend income.
Shareholders should assess their slab and total income while calculating tax liability from buybacks.
A higher Section 87A rebate of up to Rs. 12 lakh makes the new tax regime more beneficial for the middle class.

Examples for Clarity

Example 1: Buyback Before 1st October 2024

A company repurchases 500 shares at Rs. 650 each. The original issue price was Rs. 50.

Distributed Income = (Rs. 650 - Rs. 50) x 500 = Rs. 3,00,000
Buyback Tax @ 23.296% = Rs. 69,888 (paid by the company)
Shareholder pays no tax.

Example 2: Buyback After 1st October 2024

Same example, but the buyback happens in November 2024.

Total amount received by shareholder = Rs. 650 x 500 = Rs. 3,25,000
This amount is taxed as dividend income under Section 2(22)(f)
No deduction for acquisition cost.
Rs. 25,000 (i.e., Rs. 650 - Rs. 50 = Rs. 600 x 500) is deemed capital loss, which can be carried forward for 8 years.

Conclusion

With the new rule applicable from October 2024, the Income Tax on Buyback of Shares now shifts the burden from companies to shareholders. It becomes important for investors to plan their income and capital gains wisely. Companies also need to consider alternative strategies for returning value to shareholders. For advisory and compliance support, reach out to tax consultants like Compliance Calendar LLP to stay updated and avoid non-compliance.

Email: info@ccoffice.in

Call/Whatsapp: +91 9988424211

Frequently Asked Questions (FAQs)

Q1. Is income from share buyback taxable for the shareholder?

Ans. If the buyback is made after 1st October 2024, yes. It is taxable as dividend income under Section 2(22)(f).

Q2. What happens to the cost of acquisition in buyback?

Ans. The cost is not deductible but is considered a deemed capital loss that can be adjusted in the future.

Q3. Is buyback tax applicable to both listed and unlisted companies?

Ans. Yes, as per the current regime till 30th September 2024. Post that, both listed and unlisted companies will follow the new rule where tax is levied on shareholders.

Q4. How long can capital loss from buyback be carried forward?

Ans. Up to 8 assessment years.

Q5. What is the tax rate under Section 115QA?

Ans. Effective rate is 23.296%, which includes 20% base rate + surcharge + cess.

Q6. Will TDS be applicable on buyback proceeds post 1st October 2024?

Ans. Yes, since the amount is deemed as dividend, normal TDS provisions under dividend income may apply.