Buy-Back of Shares After October 2024 — The Shift to Shareholder Taxation

The Finance (No. 2) Act 2024 shifted the tax point on share buy-backs from the company to the shareholder. What changed, who bears the new tax, and the implications for both sides.

The taxation of share buy-back by domestic companies underwent its most significant change in over a decade with effect from 01 October 2024. The framework that had been in place since 2013 — under which the company paid an additional tax and the shareholder received the buy-back consideration tax-free — was replaced by a shareholder-side taxation regime that effectively treats the buy-back consideration as a deemed dividend.

This article explains what changed, who bears the new tax, and the practical implications for companies considering buy-backs and for shareholders participating in them.

The position up to 30 September 2024

Under Section 115QA, a domestic company carrying out a buy-back of shares was liable to pay additional income tax at twenty per cent (plus surcharge and cess) on the distributed income — defined as the consideration paid by the company on the buy-back, reduced by the amount received by the company for the issue of those shares.

The corresponding Section 10(34A) exempted the income arising to the shareholder from such buy-back in the hands of the shareholder. The practical effect was a single point of taxation at the company level, with the shareholder receiving the buy-back proceeds tax-free.

For capital-rich companies looking to return cash to shareholders, this often made buy-back more tax-efficient than dividend distribution — particularly after the abolition of dividend distribution tax (DDT) in 2020, which had shifted dividend taxation to the shareholder's marginal rate.

What changed from 01 October 2024

The Finance (No. 2) Act, 2024 amended the framework with effect from 01 October 2024:

• Section 115QA is no longer applicable to buy-backs by domestic companies on or after 01 October 2024 (transitional treatment applies for buy-backs completed before the cut-off)
• Section 10(34A) shareholder exemption is correspondingly withdrawn
• The buy-back consideration received by the shareholder is now treated as a deemed dividend under Section 2(22)(f) (a new clause inserted)
• Dividend taxation rules apply — the deemed dividend is taxable at the shareholder's slab rate, and where applicable, TDS under Section 194 (ten per cent for domestic shareholders) or Section 195 (DTAA rates for non-resident shareholders) is applicable

The shift moves the tax point from the company to the shareholder, and aligns buy-back taxation with the post-DDT dividend regime.

How the shareholder is taxed

The full amount of buy-back consideration is treated as deemed dividend — there is no offset for the original cost of acquisition under Section 2(22)(f). The cost of acquisition of the bought-back shares is treated as a capital loss in the year of buy-back, which can be set off against other capital gains under the usual rules.

A worked illustration: a shareholder acquired 1,000 shares at Rs. 100 each (cost Rs. 1,00,000). The company buys back the shares at Rs. 300 per share (consideration Rs. 3,00,000).

• Deemed dividend in shareholder's hands: Rs. 3,00,000 (taxed at slab rate, subject to TDS under Section 194)
• Capital loss arising: Rs. 1,00,000 (set off against other capital gains in the year, or carried forward)

Note that the cost-of-acquisition treatment as a capital loss can create timing mismatches — the dividend income is taxed in the year of buy-back, but the capital loss is useful only if the shareholder has capital gains to absorb it. For shareholders without capital gains, the loss carries forward for eight assessment years under Section 74.

TDS by the company on buy-back consideration

The company carrying out the buy-back is now required to deduct TDS on the consideration paid:

• Resident shareholders — ten per cent under Section 194 on dividends above Rs. 5,000 in a financial year
• Non-resident shareholders — rates as per Section 195 read with the applicable DTAA, typically five to fifteen per cent depending on the treaty

The TDS obligation applies regardless of whether the shareholder is a promoter, a financial investor, or a retail investor. The company should obtain Form 15G or 15H from eligible resident shareholders to apply no deduction or lower deduction where allowed.

Implications for companies

The change makes buy-back economically less attractive in many cases compared to the earlier regime, since the tax cost shifts to the shareholder and the company can no longer give the buy-back proceeds tax-free.

For companies considering buy-back as a capital-return strategy:

• Buy-back is now broadly tax-equivalent to dividend distribution at the shareholder level
• The choice between buy-back and dividend now depends on factors other than tax — capital reduction, signalling to the market, the share-price impact, and EPS optics
• Companies with significant non-resident shareholders may find buy-back marginally more attractive due to potentially lower DTAA rates than the slab-rate dividend taxation

Implications for shareholders

For resident individual shareholders, the buy-back consideration is now fully taxable as dividend at the marginal slab rate. The post-tax return on a buy-back at a particular price is now meaningfully lower than under the earlier regime for higher-bracket shareholders.

For institutional shareholders and pension funds, the taxation depends on the entity's overall tax status and exemptions.

For non-resident shareholders, the buy-back consideration is subject to TDS at DTAA rates. Reclaiming any excess deduction requires filing an Indian tax return.

Practical considerations during a buy-back

For companies undertaking a buy-back after 01 October 2024:

• Update the buy-back offer document and shareholder communication to disclose the change in tax treatment
• Set up TDS deduction at the time of payment to each shareholder, applying the correct section (194 for residents, 195 with DTAA for non-residents)
• Obtain documentation from non-resident shareholders (TRC, Form 10F, beneficial-ownership declaration) to support DTAA rate application
• Issue TDS certificates (Form 16A) to shareholders for the deduction
• File Form 26Q and Form 27Q quarterly with the consolidated buy-back deduction information
• For listed companies, coordinate with the depositories and registrar for the tax deduction at source on each shareholder's payment