Share Buyback Tax Shifted to Shareholders from October 2024
Why in the news
The tax treatment of share buybacks changed from 1 October 2024 through the Finance Act, 2024, aligning it with dividends and affecting investor returns and company payout choices.
What is a buyback
A company repurchases its own shares from current holders, usually at a price above the market rate. Fewer shares remain outstanding, which can lift earnings per share and the ownership percentage of those who stay.
Legal basis
- Sections 68-70 of the Companies Act, 2013, plus SEBI (Buyback of Securities) Regulations, 2018 for listed firms.
- Board or shareholder approval is needed, depending on size.
- Routes: existing shareholders proportionately, open market, employees holding ESOP shares, and odd-lot holders.
Old and new regime
| Point | Before 1 Oct 2024 | From 1 Oct 2024 |
|---|---|---|
| Who is taxed | Company: 20% plus surcharge and cess on distributed income (Section 115QA) | Shareholder: whole amount as dividend income |
| Investor tax | Proceeds tax-free | Slab rate of the individual; TDS under Section 195 for non-residents |
| Rationale | Introduced in 2013 to stop firms avoiding Dividend Distribution Tax | Simplify and bring parity between dividends and buybacks |
Implications
- Investors: high-tax individuals get lower post-tax returns; foreign investors may feel withholding tax effects, depending on DTAA benefits.
- Companies: may prefer buybacks less, and could raise dividends or share-based incentives.
- Market: a short-term dip in buyback announcements after October 2024 and a possible rebalancing of capital allocation.
Exam angle
- Section 115QA of the Income Tax Act.
- Effective date: 1 October 2024.
- Parity of buybacks and dividends.