Share Buyback — Tax Implications for Company and Shareholders

A share buyback (repurchase) occurs when a company purchases its own shares from existing shareholders. Buybacks are regulated under Sections 68-70 of the Companies Act 2013 and have specific tax treatment under the Income Tax Act — which underwent significant changes in the Finance Act 2024. Here is the complete guide.

Companies Act — Share Buyback Conditions

• Maximum buyback: Up to 25% of total paid-up capital and free reserves in a financial year
• Post-buyback debt-equity ratio must not exceed 2:1
• Shares must be fully paid-up
• Board resolution (for buyback up to 10% of paid-up capital + free reserves); Special resolution at EGM (for buyback above 10%)
• Gap between two buybacks: At least 1 year
• Methods: Tender offer (open to all shareholders proportionally) or open market purchase through stock exchange

Tax Treatment — Before Finance Act 2024 (Unlisted Companies)

• The company paid Buyback Tax at 20% (+ surcharge + cess = 23.296%) under Section 115QA on the distributed income (buyback price minus issue price)
• Shareholders received buyback proceeds tax-free (Section 10(34A) exemption)
• This regime was more tax-efficient than dividend distribution

Finance Act 2024 — Major Change for Listed Companies (from October 1, 2024)

• For listed companies: Buyback tax under Section 115QA is abolished
• Instead, buyback proceeds are now taxable in the shareholder's hands as dividend income — at applicable slab rate
• The company must deduct TDS (under Section 194) on the buyback proceeds
• Cost of acquisition of shares bought back is treated as a capital loss for the shareholder

Tax Treatment for Unlisted Companies — Section 115QA Continues

• Unlisted companies continue to pay buyback tax at 23.296% under Section 115QA
• Shareholders of unlisted companies — buyback proceeds still tax-free under Section 10(34A)
• This disparity between listed and unlisted company buybacks creates planning opportunities

Conclusion

Share buyback taxation is now a split regime — unlisted companies retain the company-pays 115QA model, while listed companies have moved to shareholder taxation post Finance Act 2024. SPOTON provides buyback tax advisory, Companies Act procedure and secretarial compliance for companies in Kerala. Contact us for expert corporate finance and tax services.