Taxation on buyback of shares

Income Tax Income from Capital Gains
1

Let’s say you own shares of a company which is currently trading at a price of ₹150. Now the company comes out and announces that they are willing to buy your stocks for ₹180 per share. This process of a company repurchasing its shares back from the shareholders is known as a share buyback.

They can do this either through an open market offer or a tender offer.

Open market offer: The company buys back its shares directly from sellers on the exchange.

Tender offer: The company announces a tender to buy back shares on a fixed date and price, which in most cases is more than the market price. The shareholders have the option of accepting or declining the offer.

Why do companies do a buyback?

A company may do a buyback for several reasons:

  1. Consolidate ownership by increasing promoter holding
  2. They believe the stock is undervalued and hope to boost the stock price to its fair value.
  3. It is a tax-effective way of rewarding shareholders.
  4. They have surplus funds and not enough projects to invest in.
  5. Buybacks reduce the number of outstanding shares of the company, thus enhancing the EPS (earnings per share) for existing shareholders.

How are gains from a buyback taxed?

Whenever a company announces a tender offer, the share price fixed is usually higher than the market price.

Like recently, Bajaj Auto announced a buyback worth ₹4,000 crores where the buyback price per share was fixed at ₹10,000.

The record date was fixed at 29th Feb 2024, and if you had purchased shares before this date, you’d be eligible for the buyback. The share price around this date was approx. ₹8,000. So, if you participated in the buyback and the shares were accepted, you’d earn a profit of ₹2,000 and this would be entirely tax-free.

This is because u/s 115QA of the Income Tax Act, companies announcing the buyback are liable to pay taxes at a flat 20%. Hence, to avoid double taxation, the investors don’t have to pay any taxes on gains they make selling their shares in a buyback.

So which buyback did you participate in? Let us know below!

2

in the buyback ; the company pays the tax and the seller (who will no longer be the shareholder) of the shares don’t pay any tax !

my query is : isn’t it unfair on the part of the existing shareholders of the company ? because when the company pays tax ; the bank/cash/reserve balance depletes which is loss to the existing shareholders of the company ?

3

Hey @HIREiN,

That could be one way to look at it, however, with fewer outstanding shares, the ownership percentage of existing shareholders increases when a buyback takes place.

Moreover, this is the current taxation with regard to buyback as per the Income Tax Act.

4

My father accumulated a total 717 Engineers India Share from 2019 to 2021. He later participated in buyback where 717 shares were deducted from his demat account. But out of those 717 shares only 458 shares were accepted and 259 were returned back to his demat account. Question is tax on selling those 259 shares. The COA of those 259 shares will be the actual purchase price or buyback issue price or something else?

5

Hey @nitinjain105,

The cost of acquisition will be the original cost at which the shares were bought.

6

Hi
saw your reply on buyback of bajaj auto. You have mentioned that the gains are exempt. In that case while filing of ITR, should we show the sale consideration and the cost of acqusition of the buyback shares in the return of income?
At the time of calculation of tax in Part TT1 of the return, the data reflected in the Schedule of Exempt Income i.e. EI of the ITR2 is not being populated and therefore the tax is calculated on exempt income also. Can you help with this issue?

7

Hi @Soniya

Any income arising as a result of Buy Back is exempt in the hands of shareholders u/s 10(34A) of the Act. Hence, you need to disclose the net income arising from buy back in Schedule-EI of ITR. Hope this clarifies.For further assistance, you can connect with me on my instagram handle @FinTaxSnippets.

Thanks

8

Hi @Soniya,

You’ll have to report this income in schedule EI and not schedule CG. Once you add it in schedule EI, it’ll not be added to your taxable income.

9

Ok… so will my taxable income be reduced accordingly and tax be calculated on the balance capital gains??

10

Hey @Soniya,

The exempt income will not have an effect on taxable income. It will neither reduce it nor will it be added to the taxable .income

11

Hi
I have got payout for ESOP buyback from my company. I never exercised the stocks, they got vested and they are now appearing as cancelled stocks in my ESOP report. The payout amount I received is coming in Form16 in below section

  1. Add: Any other income reported by the employee under as per section 192 (2B) :
    Income under the head Other Sources offered for TDS

Currently it is taxed under normal TDS slab .Where should i declare this income in ITR form 2 and how will it get taxed? Will i get any relaxation or will it get taxed in income slab