A buyback is when a company buys its own shares from its shareholders. By doing this, the total number of shares in the market reduces, which can help increase the value of the remaining shares and strengthen the company’s financial position.
Why Do Companies opt for Buyback of Shares?
Although companies raise funds by issuing shares, there are several strategic reasons for buying them back:
- Consolidation of Ownership: A higher number of shareholders often leads to dispersed ownership and increased administrative costs. A buyback helps the company reduce shareholding dispersion and consolidate control.
- Rectification of Undervalued Share Price: Sometimes, the market undervalues a company’s shares. A buyback signals confidence and assists in stabilizing or improving the share price.
- Enhanced Financial Ratios: With fewer outstanding shares, important metrics such as Earnings Per Share (EPS) improve, making the company’s financial performance appear stronger.
- Increase in Promoter Shareholding: Buybacks are also used strategically when promoters intend to raise their stake in the company.
Budget 2024: Major Overhaul in Buyback Taxation
The Union Budget 2024 has introduced a significant shift in the tax framework governing share buybacks. At present (till Sep 2024), companies were required to pay buyback tax on the difference between the price at which shares were issued and the price at which they are bought back. This mechanism was implemented in 2013, aligned with the then-existing Dividend Distribution Tax (DDT).
Since the Finance Act, 2020 abolished DDT and made dividends taxable in the hands of shareholders, Budget 2024 now proposes similar treatment for buybacks. Accordingly, the tax liability on buybacks will shift from the company to the shareholder.
Key Change from 1 October 2024
- Buybacks executed on or after 1 October 2024:
No buyback tax will be levied on the company. - Shareholders receiving buyback proceeds:
The entire amount received will be treated as a deemed dividend and taxed as per the shareholder’s applicable slab rate under the newly inserted Section 2(22)(f).
| Feature | Before 1 October 2024 | From 1 October 2024 Onwards |
| Tax Liability | The company was responsible for paying Buyback Tax (BBT). | The tax burden shifts to the shareholder. |
| Taxable Amount | Tax was levied on the difference between the buyback price and the original issue price. | The entire amount received by the shareholder is treated as deemed dividend and taxed accordingly. |
| Tax Treatment for Shareholder | Buyback proceeds were fully exempt in the hands of shareholders. | The amount received is taxed as Income from Other Sources, based on the shareholder’s applicable slab rate. |
| Capital Loss Treatment | Not applicable to shareholders; no impact on their tax return. | The acquisition cost becomes a deemed capital loss (Sale Value which shall be Zero-Actual Cost of Shares), which can be set off against other capital gains and carried forward for up to 8 assessment years. Sec Section 46A of the Income Tax 1961. |
Treatment of Cost of Acquisition
You may wonder whether the cost of acquiring such shares can be claimed as a deduction from the deemed dividend income.
The answer is No.
- The cost of acquisition cannot be deducted against deemed dividend income.
- Instead, this cost will be treated as a deemed capital loss, which can be carried forward and adjusted against capital gains from the sale of remaining shares in the future.
Case1: Buyback Before 1 October 2024 (Old)
Company: Alpha Ltd
Buyback Date: August 2024
No. of Shares Bought Back: 1,000
Buyback Price: ₹500 per share
Issue Price: ₹100 per share
Computation:
- Distributed Income per Share = ₹500 – ₹100 = ₹400
- Total Distributed Income = 1,000 × ₹400 = ₹4,00,000
- Buyback Tax (effective rate: 23.296%) = ₹93,184 paid by the company
- Shareholder Tax Impact: Amount received is fully exempt.
Outcome (Old before Oct 2024):
- Tax paid by: Company
- Shareholder receives: ₹500 per share (tax-free)
Case2: Buyback After 1 October 2024 (New)
Company: Alpha Ltd
Buyback Date: November 2024
No. of Shares Bought Back: 1,000
Buyback Price: ₹500 per share
Issue Price: ₹100 per share
Computation
- The company is not liable for buyback tax.
- Shareholder receives: ₹500 per share
- Entire ₹500 is treated as deemed dividend under Section 2(22)(f).
Tax for Shareholder
Suppose the shareholder falls in the 30% slab:
- Taxable Income = ₹500 × 1,000 = ₹5,00,000
- Tax @ 35.88% (including surcharge + cess) = ₹1,79,400
Capital Loss Treatment
- Original cost of shares = ₹100 per share
- This ₹100 × 1,000 = ₹1,00,000 becomes a deemed capital loss
- It can be used to set off against future capital gains for up to 8 years.
Outcome (New from Oct 2024 onwards)
- Tax paid by: Shareholder
- The entire buyback amount is taxable.
- Cost becomes capital loss (set-off available later).
How Is Buyback Tax Computed?
The tax is calculated on the distributed income, which is:
Distributed Income = Buyback Consideration – Issue Price of Shares
For buybacks through the open market, the company does not consider the investor’s purchase price. Tax is computed strictly on the difference between the buyback price and the original issue price.
Due Date for Payment of Buyback Tax
The company were required to deposit buyback tax within 14 days of distributing the buyback amount to shareholders.
Failure to pay within the deadline attracts 1% simple interest per month on the outstanding tax amount.
