How is gains arising from buyback of shares is taxed and how to show them in tax return
Hey @shriramsingla
Gains arising from Buyback of shares to an individual is exempt u/s 10(34A).
Therefore, no tax is payable on gains from buyback and such income must be reported under exempt income in the ITR.
Hope this helps 
@Sakshi_Shah1 can you help ?
As per the announcement in Budget 2019, the buyback tax was imposed on companies effective 1st July 2019. Thus, any gain/loss from buyback after 1st July 2019 is exempt from tax in the hands of the shareholder.
Gains from buyback should be reported as exempt income under Schedule EI of the ITR.
Read more about Buyback here - Section 115QA - Tax on Buyback of Shares
so . in case of buyback ; the company pays tax .
so . ultimately the company’s reserves gets reduced as the money is paid by the company on the tax on the buyback .
so . ultimately it is the shareholders who suffer the loss ! am i right ?
suppose . e.g. you and i both are share holders .
i opt for buyback , give the shares to the company . company pay me money which is tax free for me .
company pay the tax .
you don’t opt for buyback . you stay as a shareholder of the company . so , you as a sharholder got your reserves reduced as the company paid the tax .
am i right ?
@Sakshi_Shah1 can you help ?
As per the MCA provisions, a domestic company can buyback shares at maximum of 25% of paid up capital and free reserves. This provision will always keep a check on the reserves of the company.
Answering you query, Yes, paying the buyback tax will reduce the reserves of the company.
so . it is always a wise decision to participate in the buyback , and get the money which is taxfree .
later on , i can also buy the shares from the secondary market also , if i want the shares !
and if i don’t participate in the buyback ; then ; i, as a shareholder, loose the reserves thus reducing the share price , as the tax would be paid from the company’s (shareholder’s) pocket .
am i right in my understanding ?
if this is so ; then ; why don’t we see 100% shareholders’ participations in the buybacks ?
is there any loophole or pros cons which i m missing something / somewhere ?
Loop hole is the acceptance ratio.
E.g for tcs 10 out of 44 shares got accepted and now you end up with this 34 shares which you may not want to sell if buying price is more than cmp
@Sakshi_Shah1 can you help ?
Just out of curiosity, why would a company buy back their own stock??
Hey @TanyaChopra
There are multiple objectives as to why a company would buy back their shares.
- It reduces the number of shareholders of the company and enhances the EPS (Earning per share).
- Helps improve key financial ratios like return on net worth, return on assets etc. over a period of time.
- To the investors it shows the confidence the management has in the business.
We have an article specifically about Buyback Shares. You can read more about it here.
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Section 115QA is applicable to listed as well as unlisted companies. Kindly correct your blog
Provisions of section 115QA were initially applicable only to unlisted companies. However, vide the Finance (No. 2) Act, 2019, the provisions of section 115QA are amended and the same is made applicable to the listed companies also.
However, it excludes listed companies whose public announcement has been made before 5th July 2019 and was as per the provisions of SEBI Regulations. Attaching the screenshot of the Section from the Income Tax Act .
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if a private company buys back shares from capital the the shareholders suffer any tax as value of their shareholdings increase
@Divya_Singhvi @Laxmi_Navlani @Kaushal_Soni can you?
Hey @long123bridge ,
If any company buys back shares from capital, it will affect shareholding patterns of company with revised stakes. Share value may increase at time of buy back and if any shares sold or transferred by shareholders will trigger tax implications in hands of company and not investors.
You can read below article of capital gain taxation for more insights:
Hope, it helps!
Hello - I have esops of an unlisted USA company. The company is being acquired by another company now - As part of the sale agreement - The esops stand to be cancelled and a cash compensation paid to holders of esops - will this transaction fall under the purview of 115QA or the compensation paid be considered ordinary income. Is there a precedent available in tax rulings.
@Kaushal_Soni @Nireka - Please help with the query above
Hey @Vikas
Generally, ESOPs of unlisted companies are liable for tax at the time of allotment of shares (under salary head - perquisites) and at the time of sale of shares (capital gain head).
If ESOPs of unlisted company are sold within 24 months then holding period will be treated as short term and if sold beyond 24 months then it will be treated as long term respectively.
Here, in your case when company is acquired by another company and owing to which shares are got cancelled then the said transaction should not be treated as buy back and hence, taxability would not fall under the purview of 115QA of income tax act.
Any amount or consideration received should be treated as capital gain income and you can report under capital gain head in ITR.
Hope, it helps!