Share buybacks will be taxed as a dividend with the cost of acquistion set as as capital loss from 1st Oct 2024.
Why was this done? The budget memorandum states, “Both dividend as well as buy-back are methods for the company to distribute accumulated reserves and thus ought to be treated similarly.”
It further adds, “References have been received stating that pay-outs on buy-back of shares should be taxed in hands of recipients, in line with similar regime in place for
taxation of dividend”.
The rules:
- the sum paid by a domestic company for purchase of its own shares shall be treated as dividend in the hands of shareholders, who received payment from such buy-back of shares and shall be charged to income-tax at applicable rates.
- No deduction for expenses shall be available against such dividend income while determining the income from other sources.
- The cost of acquisition of the shares which have been bought back would
generate a capital loss in the hands of the shareholder as these assets have been
extinguished. Therefore when the shareholder has any other capital gain from sale of shares or otherwise subsequently, he would be entitled to claim his original cost of acquisition of all the shares
The budget memorandum provides an example
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- 100 shares bought in 2020 @Rs. 40/- per share
- Total cost of acquisition Rs. 4000/-
- 20 shares bought back in 2024 @Rs. 60/- per share
- Income taxable as deemed dividend Rs. 1200/- and taxable as per slab
- Capital loss on such buyback (Rs. 40 *20) Rs. 800/-
This loss can be offset when there is a capital gain from equity. It can also be carried forward,
- 50 Shares sold in 2025 @Rs. 70 per share
- Capital Gain (3500 – 2000) Rs. 1500
- Chargeable capital gain after set off Rs. 700
Earlier:
- Buyback was tax free (company would pay 20% tax): Rs. 1200
- Tax on Rs. 1500 at the rate of 10%: Rs. 150 + Rs 6 (4% of Rs. 150). So net gain = Rs. 1344.
- Total gain: Rs. 1200 + Rs. 1344 = Rs. 2544
Now:
- Rs. 1200 buyback will be taxed as per slab
- Assuming a Rs. 10 Lakhs income in the new tax regime, this Rs. 1200 will incur an additional tax of Rs. 187
- Net gain from buyback = Rs. 1013.
- Tax on Rs. 700 (net capital gain) at the rate of 12.5%: Rs.87.5 + Rs 3.5 (4% of Rs. 87.5).
- So net gain = Rs. 1500 (actual captial gain) minus Rs. 91 = Rs. 1409
- Total gain: Rs. 1013 + Rs. 1409 = Rs. 2422
- Effective loss: Rs 2544 – Rs. 2422 = Rs 122. The effective loss can be significant or otherwise depending on the income slab, the actual capital gain, the buy back price etc.
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