Buyback gains were exempted from taxes earlier, however in Budget 2024 it was made taxable. Will the gains from buyback be taxed as capital gains? When will this come into effect?
Amongst many other changes announced in the Union Budget 2024, one was around the taxation of buybacks.
See, earlier in 2020, any gains from buyback were made tax-free in the hands of shareholder but this year, they were again made taxable.
What is the tax rate?
The entire amount you receive from a share buyback will be taxed similar to dividends, which means at your applicable slab rates. Moreover, your cost of acquisition for such shares will be treated as a capital loss and you’ll be able to adjust it against other capital gains.
I have explained how this works with an example below.
Will TDS be applicable?
Just like in the case of dividends, profits from buybacks will also be subject to a 10% TDS if the amount exceeds ₹5,000. The company making the payment will be liable to deduct this TDS.
The TDS rate is 20% in case of NRIs.
So for example, say you brought 200 shares of company X at ₹100 per share, and participated in a share buyback where you tendered 50 shares at ₹150.
Hence, you’ll get ₹7,500 (50 * ₹150) from the buyback.
Now the company will also deduct a 10% TDS which equals ₹750 and the remaining ₹6,750 will be credited to your bank account. This amount will be added to your total income and taxed as per your slab rate.
Because you are having to pay tax on the entire buyback amount instead of actual capital gains (₹2,500 in this case), you are allowed to claim the cost of acquisition for these shares which is ₹5,000 (50 * ₹100) as capital loss.
Depending on the holding period, the loss can either be short term (holding period < 12 months) or long term (holding period > 12 months). In case of STCL, you’ll be able to adjust them against both STCG and LTCG, whereas LTCL can only be adjusted against LTCG.