New share buyback Income Tax rules from October 1, 2024

A share buyback, or share repurchase, refers to a company’s action of buying its own shares from the existing shareholders. Under the Income Tax Act, particularly in India, the tax implications of share buybacks are defined to ensure that both the company and its shareholders are clear on the taxation processes involved. Till now domestic companies undertaking share buybacks are subject to a 20% tax on net distributable income; shareholders receive the buyback proceeds tax-free. W.E.F 1 October 2024 the new buyback tax rules aim to shift the income tax liability from companies to shareholders. The finance minister announced a complete revamp of the buyback taxation in Budget 2024.

As per Section 10(34A) the entire amount received by shareholders from buybacks will be treated as dividend income and taxed according to their respective income tax slabs, with the responsibility for withholding tax (TDS) on the company.

The buyback proceeds, which are to be taxed as “dividend”, will not be taxable as “capital gains” under the income tax laws. Cost of acquisition of shares will not be allowed deduction against the dividend income in the form of buyback. However, the cost of acquiring shares tendered in a buyback will be treated as a capital loss (either short term or long term) for shareholders, which can be offset against other capital gains or carried forward for up to eight years.