Taxability On Buyback Of Shares Of Companies: Buyback of shares means the re-acquisition of its own shares by a company. It also means returning the money of shareholders while obtaining back its shares. In such a case, the shareholders receive the market value of shares, and the company re-absorbs its ownership portion from the public.
The taxes to be charged while buying back shares is also divided based on the listing of the company, which are as follows:
- Buyback by Listed Companies
- Buyback by Unlisted Companies
Table Of Contents
Taxability in the hands of companies: Listed companies are not taxable for the buyback of their own shares.
Taxability in the hands of shareholders: The taxes to be charged at the end of shareholders depend on the buyback of shares. Buyback of shares is classified into two categories which are as follows:-
For Buyback of shares directly from shareholders: The profit in the hands of shareholder while buyback of shares is liable to taxation as follows:
For Long-term capital gain (for holding periods of more than 12 months): Any profits from long-term capital shall be taxable as per Section 112 of the Income Tax Act at any of the following lower rates:
- 20% of capital gain after indexation.
- 10% of capital gain without indexation.
As per Section 112, there won’t be any benefit of exemption for capital gains up to ₹100,000, and the flat tax rate of 10% shall be charged for capital gains exceeding ₹100,000. Such transactions do not come under Securities Transaction Tax (STT).
For Short-term Capital gain (for holding periods less than 12 months): As per Section 48 of the Income Tax Act, profits from short-term capital are taxable at the applicable rate for the shareholder.
An individual falling under the 5% tax slab shall be charged at the rate of 5%. Individuals will be assigned a tax rate at the already applicable rate. Benefits for a flat tax rate of 15% is not available under Section 111A as such transactions are not chargeable to Securities Transaction Tax (STT).
For Buyback of shares via Recognized Stock Exchange: The profit of shareholders shall be liable to taxation in the following ways:
For Long-term capital gain (for holding periods of more than 12 months): Any capital gains that are exceeding ₹100,000 shall be charged under Section 112A at a flat tax rate of 10% as such transactions are chargeable to Securities Transaction Tax (STT).
But such benefits are available only when the acquisition of shares was charged to STT; otherwise, such acquisition shall be taxed in the form of buyback directly from the shareholder.
For Short-term capital gain (for holding periods less than 12 months): Any gains from short-term capital is taxable under Section 111A at a flat rate of 15%. Such transactions are also chargeable to Securities Transaction Tax (STT).
Taxability in the hands of companies: As per Section 115QA of the Income Tax Act, buyback of shares by any unlisted companies is liable for taxation at a flat rate of 20% on the ‘distributed income’. Distributed income means any such consideration paid by the unlisted company on the buyback of shares as reduced by the amount which was received by the unlisted company while issuing such shares.
Other Points to consider
- As per Rule 40BB of Income Tax Rules, 1962, the complete procedure of calculating the amount of Distributed Income in various cases.
- Under Section 115QA, the tax charged on the income of shareholders or companies shall not be entitled to any deduction under any provision of the Income Tax Act.
- An additional tax shall be charged over and above the tax charged on the total income of the unlisted company despite no income tax to be charged to the company under the provision of the Income Tax Act.
- The tax charged on distributed income shall be the final tax payment, and no additional credit shall the company claim or any other person in respect of the tax amount paid.
Taxability in Hands of Shareholders
As per Section 10(34A) of the Income Tax Act, any receipts in the shareholder’s hands are exempted for taxes.