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The Finance Act, 2024 has amended the tax treatment of income arising from the buy-back of shares by companies. These changes will come into effect for buy-backs conducted on or after October 1, 2024, and will apply to transactions falling within the financial year 2024–25 (assessment year 2025–26) onward.

Importantly, any buy-back of shares completed before October 1, 2024 will continue to be governed by the provisions that were in force prior to this amendment.

In this article the distinction of taxation of income from buyback of shares pre and post amendments have been discussed.

Tax Treatment Before October 1, 2024:

Until September 30, 2024, the taxation of buy-backs by domestic companies is governed by the following provisions:

(1) Section 115QA – Tax on Distributed Income Paid by Company

• A domestic company is liable to pay a tax of 20% (plus applicable surcharge and cess) on the income distributed to shareholders through a buy-back.
• This tax is paid by the company, not the shareholder.

(2) Section 10(34A) – Exemption for Shareholders

• Income received by shareholders from such buy-backs is exempt from tax, since the company has already paid the applicable tax.

(3) Section 46A – No Capital Gains in Shareholder’s Hands

• Shareholders are not liable for capital gains tax, as the transaction is covered by the exemption under Section 10(34A).

Tax Treatment On or After October 1, 2024:

For buy-backs occurring on or after October 1, 2024:

1. Buy-Back Amount Treated as Dividend in Shareholder’s Hands

• The payment made by a company to repurchase its own shares under Section 68 of the Companies Act, 2013 will now be deemed a "dividend" under Section 2(22) of the Income-tax Act.
• This amount will be taxable in the hands of the shareholder under the head “Income from Other Sources”.
• As per the amended Section 57, no deductions will be allowed from this income.

2. Withdrawal of Exemption Under Section 10(34A)

• The exemption previously available to shareholders receiving income from buy-backs under Section 10(34A) has been removed for transactions on or after October 1, 2024.
• This means shareholders will now be liable to pay tax on the entire amount received from such buy-backs.

3. Deemed Nil Consideration for Capital Gains (Section 46A)

• For the purpose of calculating capital gains under Section 46A, the amount received on buy-back will be deemed to be nil.
• This results in a capital loss equal to the cost of acquisition, but such a loss cannot be set off against the income taxed under “Income from Other Sources.”

Example 1 – Tax on Amount Received from Buy-Back:

Ms. B participates in a buy-back offer made by Company Y on October 15, 2024. The company buys back 1,000 shares from her at ₹600 each, and she receives ₹6,00,000.

• Under the amended provisions, this amount is treated as dividend income under Section 2(22) and taxed in Ms. B’s hands as “Income from Other Sources.”
• She will pay tax on the full ₹6,00,000 at her applicable slab rate.
• No deductions are allowed from this income under the amended Section 57.

Example 2 – Capital Loss with No Relief

Mr. C acquired shares of Company Z at ₹3,00,000. On November 1, 2024, Company Z buys back these shares and pays Mr. C ₹4,00,000.

For capital gains purposes, under the amended Section 46A, the buy-back consideration is deemed to be nil.

• This results in a capital loss of ₹3,00,000 (cost of acquisition minus deemed consideration).
• However, the ₹4,00,000 received is taxable as income from other sources.
• The capital loss ₹3,00,000 cannot be adjusted against this income of ₹4,00,000

Conclusion:

The Finance Act, 2024 brings a significant shift in the taxation of share buy-backs starting from October 1, 2024. The changes transfer the tax burden from companies to shareholders, increasing the post-tax cost of receiving buy-back proceeds. However, transactions executed before this date remain unaffected and will continue to benefit from the earlier, more favorable tax treatment.

Understanding these changes and planning accordingly is crucial for both companies and investors as the effective date approaches.

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Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. Readers are advised to consult with a qualified tax advisor or legal professional for specific advice tailored to their individual circumstances, particularly regarding reassessment proceedings and claiming refunds. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the content of this article.