Share Buybacks: How Skewed Tax Rules Are Killing the Idea

When Infosys announced a massive share buyback, investors expected another round of value unlocking. But there’s a twist - the plan is reportedly stuck with the US-SEC because of procedural delays, and even if it clears, buybacks in India are losing their shine fast.

The reason? Taxation.

Since October 2024, India’s new buyback tax structure has quietly made one of the most shareholder-friendly actions almost irrelevant.

The Great Buyback Slowdown

Until recently, share buybacks were a corporate favorite. They allowed companies with excess cash to reward shareholders by purchasing their own shares, reducing equity base and improving per-share metrics.

But 2025 tells a different story.

As of end-October, India has seen buyback deals worth just ₹916 crore - down a staggering 95% from the same period last year.

That’s not a blip. It’s a message.

The sharp fall coincides with the new buyback taxation regime introduced in October 2024. Infosys’s own promoters chose not to participate, calling it “unfavorable”.

So, what changed?

The Old Buyback Tax Model: Simple, and It Worked

Before October 2024, buybacks were tax-neutral for investors. If a company repurchased your shares, you received the payout tax-free much like how dividends were once handled under the old Dividend Distribution Tax (DDT) system.

The company paid the tax, not the investor.

This made sense because it was simple and predictable. But the Finance Ministry wasn’t entirely happy - they argued that it was unfair to shareholders who didn’t participate in the buyback since the tax burden was shared indirectly.

So, the government decided to change the rules.

The New Buyback Tax Model: A Complicated Shift

Starting October 2024, buyback income is no longer tax-free for investors.

Here’s how it works now:

• The entire amount received from a buyback is treated as dividend income, taxed in the hands of the investor at their peak tax rate (up to 30%).
• The cost of acquisition can only be written off later as a capital loss, but it cannot be offset against dividend income.

That’s where the problem lies.

You pay tax upfront as if it’s income but your cost-based deduction (the loss) can only be claimed later, and only against future capital gains.

So, while your money goes out today, your tax relief (if any) comes much later - if you’re lucky enough to have gains to offset.

This timing mismatch is making investors, especially high-tax individuals, completely uninterested in buybacks.

The Outcome: Everyone Loses

• Companies lose an effective tool to manage excess cash.
• Investors lose a cleaner route to receive returns.
• Markets lose an important signal of management confidence.

The new rules tried to make things fairer. Instead, they’ve made the process inefficient, complex, and unattractive for both sides.

Infosys may be one example but look beyond it, and you’ll see that corporate India has largely stepped away from buybacks altogether.

The Better Way: Treat Buybacks as Capital Gains

There’s still a middle path.

A more logical approach would be to treat buybacks like capital gains, not like dividends. That means - if an investor holds the shares for more than a year, the buyback proceeds should be taxed at the concessional 12.5% long-term capital gains rate.

This way:

• The taxation becomes fair and transparent.
• Long-term investors aren’t penalized for participation.
• Companies can continue using buybacks as an efficient capital allocation tool.

In short, it brings logic back into the equation.

Why It Matters for Indian Markets

Buybacks are more than just a payout mechanism - they reflect confidence. When companies buy back shares, it signals belief in their business value and commitment to shareholders.

Killing that with unclear or punitive tax rules sends the wrong message at a time when Indian equity participation is at record highs.

Revisiting this structure could revive corporate confidence and re-align taxation with economic sense.

FinTake

When taxation tries to fix one imbalance, it often creates another. India’s buyback tax reform aimed for fairness but ended up discouraging the very behavior it wanted to regulate.

Sometimes, good policy needs one more draft.

Disclaimer: This article is for informational and educational purposes only. It should not be treated as investment, tax, or financial advice.