Income tax on buyback of share in Union Budget 2024

Tax - A New Normal for Investors and Traders

Finance Minister Nirmala Sitaraman announced a big change in the Union Budget 2024: buybacks are now taxable like dividends. Confused? Don’t worry; I’ll explain how this tax will work, what you need to do about it, and what it means for you.

What is Buyback? 

Before we get into the meaty details of taxation let us understand what a buyback means.

Buyback simply refers to when a company repurchases its shares. Companies often buy back shares as a way of showing that they believe their stock is undervalued by the market. There are reasons why companies use buybacks but not our focus here; just know there is a new tax on buyback gain.

There are two main types of buybacks companies can choose from:

Tender Offer: In this method, the company sends an offer to its shareholders through email or other means asking them if they want to sell their shares back at a specified price which tends to be higher than the current market value.

Open Market Buyback: In this method, companies purchase stocks from open markets without setting any fixed price per share although there may be an upper limit. For instance, Paytm announced an open market buyback with the maximum price set at Rs.810 per share while the actual range occurred between Rs.702-480 during the buying back exercise.

Buyback Taxation

Now let’s talk about the new rule for taxing on buybacks that was introduced in this year’s Union Budget 2024. It can be little bit complicated so I will break it down using an example.

Example Scenario:

Buyback Transaction:

Purchase in 2020: You bought 100 shares at Rs. 40 each making total investment worth Rs. 4000.

Buyback in 2024: The company announces buyback at Rs. 60 per share and you sell 20 shares.

Taxable Income as Deemed Dividend:

Income from buyback: 20 shares * Rs. 60 = Rs. 1200

Cost of these shares (Capital Loss): 20 shares * Rs.40 = Rs.800

Under new rule, the income generated through buybacks (Rs.1200) will be considered as dividend income and taxed accordingly but since your capital is also going out with the shares so you incur a capital loss of Rs 800 which can be set off against future capital gains within eight years.

Future Capital Gain:

Sale in 2025: For instance if you sell remaining 50 shares at Rs 70 each in 2025.

Calculation of Capital Gain:

Total gain:(Rs70-Rs40)*50shares=Rs1500

After setting off previous capital loss in buyback of Rs800,your net taxable gain is Rs700.

This means that you should pay tax only on Rs700 instead of full amount which is Rs1500 because when you deduct capital loss from buy back to total gain what remains becomes subject matter for taxation.

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Conclusion

This new taxation system was introduced by our government so that we align them with dividends and also ensure that any gains made from buybacks are taxed too.As much as this might look like an extra burden on investors’ pockets it can help you significantly reduce your tax liability if only one understands how to set off capital losses against future gains.Be keen on monitoring your investments and consult tax advisor who will guide on best strategies for tax optimization under these fresh regulations.