Share Buybacks in India: Understanding the New Tax Rules

When large companies like Infosys announce a share buyback, it usually draws a lot of attention. Buybacks are often seen as a way for companies to return excess cash to shareholders and signal confidence in their own business.

But from 1 October 2024, the tax rules for buybacks in India have changed in a big way. Many investors are now unsure whether buybacks still make sense for them, especially from a tax point of view.

This article explains, in simple terms:

• How buybacks worked earlier
• What exactly changed from October 2024
• How different types of investors may be affected
• What a more balanced tax approach could look like

The Recent Slowdown in Buybacks

Market commentary after the tax change has pointed to a slowdown in buyback activity in India. However, the extent of that slowdown can vary depending on the period being measured, the data source being used, and whether large later announcements are included.

Several factors may be at play:

• Change in the tax treatment for shareholders from 1 October 2024
• Global and domestic market conditions
• Company-specific capital allocation choices, such as preferring dividends or capex instead

It is reasonable to say that the new tax regime has made buybacks less attractive for some categories of investors, especially those in higher tax slabs. But it is only one piece of a larger picture.

How Buybacks Were Taxed Earlier (Till 30th September 2024)

Under the earlier rules, the buyback proceeds were generally exempt in the hands of shareholders, while the company paid tax under section 115QA.

Here is how it worked:

• The company paid a special "buyback tax" under section 115QA on the distributed income arising on the buyback, broadly linked to the difference between the buyback payout and the amount originally received by the company at the time of issue of those shares.
• The amount received by shareholders on buyback was exempt in their hands under section 10(34A).
• Since the shareholder's receipt was exempt, there was normally no capital gains tax when shares were tendered in a buyback.

So, from an investor's point of view, the tax was simple because the company handled it. From the government's point of view, however, this structure kept the tax burden at company level and created some perceived imbalances.

Why the Rules Were Changed

The Finance (No. 2) Act, 2024 changed the buyback regime with effect from 1 October 2024. The main policy reasons stated or implied were:

• To remove the tax arbitrage between buybacks and dividends, as promoters and large shareholders often preferred buybacks for better tax outcomes
• To shift taxation from the company to the shareholder, similar to dividends after the removal of Dividend Distribution Tax (DDT)
• To make the tax incidence more aligned with the person receiving the cash, rather than the company paying it

In short, the intent was to close perceived loopholes and treat buybacks more like a distribution of profits to shareholders.

The New Buyback Tax Rules (From 1 October 2024)

For buybacks taking place on or after 1 October 2024, three key changes apply:

• No company-level buyback tax: Section 115QA no longer applies to these buybacks. The company does not pay buyback tax.
• Amount received is treated as dividend: The full amount received by the shareholder in a buyback is treated as deemed dividend under section 2(22)(f) of the Income-tax Act and is taxable in the shareholder's hands as income from other sources at the applicable rate.
• Cost shows up as a capital loss: For capital gains purposes, the consideration for the buyback is deemed to be nil under the amended section 46A. So, the shareholder effectively books a capital loss equal to the cost of those shares.

What this means in practice:

• The shareholder pays tax on the entire amount received from the buyback at the applicable tax rate. For residents, this is generally based on the slab rate applicable to them for the relevant year and tax regime. For eligible non-residents, domestic law and treaty provisions may both matter.
• The cost of acquisition becomes a capital loss. This loss:
  • can be set off only against other capital gains, subject to the normal set-off rules, and
  • can generally be carried forward for up to 8 assessment years if not fully set off, subject to normal return-filing conditions.
• The capital loss cannot be set off against the dividend income created by the same buyback.
• TDS by the company: Companies are required to deduct tax at source on the deemed dividend at the time of payment. For resident individual shareholders, TDS under section 194 generally applies at 10% where such dividend paid during the financial year exceeds ₹10,000. For non-resident shareholders, withholding under section 195 applies at rates in force or lower treaty rates, subject to documentation.

This split treatment, dividend income on one side and capital loss on the other, is the core structural change.

A Simple Illustration (for Understanding)

(Note: This is a simplified illustration, ignoring surcharge, cess, TDS and other nuances. Actual tax will vary by individual.)

Assume:

• You bought 100 shares at ₹100 each (total cost = ₹10,000).
• The company does a buyback at ₹300 per share (total amount received = ₹30,000).
• You are in the 30% tax slab, and ignore surcharge and cess for now.

Earlier regime (before 1 October 2024):

• The company paid buyback tax under section 115QA on the distributed income arising on the buyback.
• ₹30,000 received by you was exempt. No further tax in your hands on this buyback.

New regime (from 1 October 2024):

• The full ₹30,000 is treated as dividend income in your hands and taxed at your applicable rate.
  • At 30%, tax is about ₹9,000 on the buyback amount, ignoring surcharge and cess.
• For capital gains purposes, the consideration is taken as nil, and you record a capital loss of ₹10,000, being your cost.
• You can use this ₹10,000 capital loss only to set off against capital gains in the current year or future years, subject to the law.

This example shows why high-slab investors may feel the post-2024 tax outcome is heavier, unless they have sufficient capital gains to use the loss effectively.

Who May Be Impacted and How

The impact of the new rules is not uniform. It depends on the type of investor and their overall tax profile.

(a) High-slab resident individuals

• Tax on the full buyback amount at the highest slab rate, plus surcharge and cess where applicable, can be significant.
• The capital loss helps only if they have or will have other capital gains to set off in the present or future years.
• For such investors, buybacks may now be less attractive compared to earlier.

(b) Lower-slab resident individuals

• For some lower-tax-bracket investors, the new regime may not always be worse in effective terms.
• However, the outcome depends on their total income, tax regime, surcharge, cess, and whether they can actually use the capital loss.
• In some situations, the change may be neutral or only moderately adverse rather than sharply negative.

(c) Non-resident investors

• Tax on the dividend element is generally deducted at source at rates in force or treaty rates, subject to eligibility and documentation.
• Depending on the tax treaty and foreign tax credit rules in their home country, some non-resident investors may not be significantly worse off, though the outcome will vary case by case.

(d) Companies

• They no longer pay buyback tax under section 115QA for post-1 October 2024 buybacks.
• They need to comply with dividend-style withholding obligations and the associated reporting requirements.
• They may re-think whether to use buybacks, dividends, or a mix, based on their shareholder base and capital allocation plans.

Takeaways for Investors

If you are a shareholder evaluating whether to participate in a buyback under the new regime, some practical questions to consider are:

• What is your current tax position for the relevant year?
• Which tax regime are you under, where relevant?
• Do you expect meaningful capital gains in the near future so that the capital loss can be used efficiently?
• How does the post-tax outcome of tendering in the buyback compare with:
  • selling the shares on the market, or
  • continuing to hold for the long term?
• Are you a resident or non-resident, and what treaty provisions apply to you, if any?

The answers will be different for each investor, even though the legal framework is the same for everyone.

A Possible Alternative Approach (Policy Discussion)

Some tax practitioners have suggested that buybacks could be taxed more like capital gains, rather than as dividends on the full consideration. One example of such an approach could be:

• Treat the buyback amount as sale consideration for capital gains calculation.
• Apply the long-term or short-term capital gains rules depending on the holding period.
• Tax only the economic gain, that is, sale price minus cost, instead of taxing the gross payout as dividend.

Potential advantages of such a model:

• Tax would be directly linked to the actual gain or loss on the investment.
• Long-term shareholders would not feel penalised for participating in a buyback.
• The structure would be closer to how an open-market sale of shares is taxed.

However, policymakers may worry that a pure capital gains model could again make buybacks far more attractive than dividends for some shareholder groups, bringing back arbitrage. Any alternative design would need to balance simplicity, fairness, and revenue considerations.

This section is only a discussion of possible policy directions, not a prediction or recommendation.

Why This Matters for Indian Markets

Buybacks are one of the tools companies use to manage capital. Along with dividends, capex, acquisitions, and debt repayment, buybacks send signals on how management thinks about:

• excess cash on the balance sheet,
• the company's intrinsic value versus market price, and
• how quickly they want to return cash to shareholders.

When tax rules change, behaviour usually changes too:

• Some companies may reduce buybacks and increase dividends.
• Some may still use buybacks selectively where they believe it makes sense for their shareholder mix.
• Investors may increasingly do a post-tax comparison instead of assuming that buybacks are automatically better.

For a growing equity market like India, clear and predictable tax rules help both companies and investors make informed long-term decisions. The 2024 changes bring buybacks into a new framework, and over time, data will show how companies and investors adapt.

FinTake

The 2024 buyback tax changes do not kill buybacks, but they do change the economics meaningfully for many investors, especially those in higher tax slabs. The law now:

• shifts the tax from company to shareholder,
• taxes the gross buyback amount as dividend income,
• recognises the share cost separately as a capital loss, and
• requires the company to deduct tax at source on the deemed dividend.

Whether this is favourable or not depends on who you are, how you are taxed, which tax regime applies to you where relevant, and what your broader portfolio looks like. For now, the key is to understand the rules clearly, compare post-tax outcomes, and then decide how to respond when a buyback is announced.

Disclaimer: This article is for informational and educational purposes only, based on the law as publicly available at the time of writing. It is not investment, tax, or financial advice, and should not be used as a substitute for personalised advice from a qualified professional who understands your specific situation.