Tax On Buyback of Shares — Explained

This document covers

1. Meaning of Buyback of shares
2. Reasons for buyback of shares
3. Sources of Buyback of shares
4. Taxability of buyback of shares in the hands of shareholders

1. Meaning of Buyback of shares

1. Buyback means company purchasing its own shares from the existing shareholders
2. Generally, the company purchases its shares from the shareholders at a higher price than the current market price.
3. Buyback reduces the number of outstanding shares in the market, and it increases the value of remaining shares in the market.

2. Reasons for buyback of shares

The companies can decide to buy back its own shares due to various reasons like

1. Increase in share value through Earnings per shares (EPS) and Return on Equity as buyback decreases the number of outstanding shares in market
2. The company can utilize surplus cash by buying back its own shares instead of paying dividends.
3. The Promoters can increase their own stake in the company by reducing the public stake by buying backing its shares
4. Buyback prevents Hostile takeovers as it increases the promoter stake

3. Sources of Buyback of shares

The companies can purchase its own shares from the following sources

1. Free Reserves
2. Securities Premium Account
3. Proceeds of the issue of any shares or other specified securities like ESOP or any other securities as notified by Central Government
4. Shareholders through a tender offer, open market purchase and/or through an investment banker who accelerate the purchase of shares.

4. Taxability of buyback of shares in the hands of shareholders

There is a change in the rules on buyback of shares in the hands of shareholders.

a. Buyback of shares effected before 01st October 2024:

If the domestic company has bought back the shares from its shareholders before 01st October 2024, the consideration received by the shareholders is exempt from tax u/s 10(34A).

b. Buyback of shares effected on or after 01st October 2024:

If the domestic company has bought back the shares from its shareholders on or after 01st October 2024,

• The consideration received by the shareholder is taxable as dividend under the head "Income from Other Sources". No expenses can be claimed against such dividends.
• Also, the taxpayers need to disclose the same under the head capital gains. For this, the taxpayer needs to show Sale consideration as "0" and cost of acquisition is his investment value. This results in Capital Loss.
• Short term capital loss can be adjusted with short term and long term capital gains. Whereas long term capital loss will be adjusted against long-term capital gain.