As of October 1, 2024, significant changes will be implemented in the taxation of share buybacksshifting the tax burden from companies to shareholders. Companies pay a tax of 23.296 per cent on buyback transactions, which covers surcharges and levies, while shareholders pay no tax on buyback income. Under the new rules, buyback income will be treated as dividends and taxed according to shareholders’ income tax brackets. Companies are required to deduct tax at source (TDS) at 10 per cent for resident individuals and 20 per cent for non-resident individuals.
“From October 1, the new share buyback rules will shift the tax burden from companies to shareholders. Instead of the current 23.296 per cent tax on buyback proceeds paid by companies, shareholders will be taxed according to their individual income tax brackets. Companies will be required to withhold tax at source (TDS) at the rate of 10 per cent for resident individuals and 20 per cent for non-residents,” said Abhishek Soni, CEO and co-founder, Tax2win.
Siddharth Maurya, Founder and Managing Director, Vibhavangal Anukulakara Private Limited, noted that the proceeds from buybacks will be treated as dividends and taxed accordingly under these new rules. This shift in tax liability from companies to shareholders will fundamentally change the way buybacks are taxed. While companies used to enjoy tax-free buybacks, now shareholders face taxes based on their income levels. This could make buybacks less attractive and potentially increase the preference for dividend distributions or other methods of capital return.”
What the current standard says
“Under Section 10(34A), the money that the shareholder receives from a share buyback is exempt. However, the company faces a tax of 20 per cent plus a 12 per cent surcharge and a 4 per cent tax on the buyback amount, adjusted for the premiums received. This results in an effective tax rate of 23.296 per cent,” explained Balwant Jain, a tax and investment expert in Mumbai.
“Currently, companies pay a tax of 23.296 per cent on buybacks, which includes surcharges and levies, while shareholders do not face any tax liability on the buyback proceeds. This setup makes buybacks tax-efficient in returning capital to investors,” said Abhishek Soni.
“The new legislation offers some benefits for specific groups. For example, non-resident shareholders could see reduced tax rates on dividends due to double tax treaties, which could encourage greater market participation. Also, funds investing in equities can benefit from a lower tax gap between dividends and buybacks. However, for high net worth individuals and resident shareholders in higher tax brackets, buyback plans may become less attractive due to increased tax liabilities. These changes will require companies and investors to re-evaluate their strategies,” said Siddharth Maurya, Founder and Managing Director, Vibhavangal Anukulakara Private Limited.
In the 2024 budget, Finance Minister Nirmala Sitharaman proposed a significant change: removing corporate tax on share buybacks. Instead, buyback income would be classified as dividends and taxed according to the individual shareholder’s income tax bracket.
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