Share buybacks, where a company repurchases its own shares from the open market, have long been seen as a positive signal for investors – often boosting share prices and shareholder value. However, a significant shift in India's tax laws, effective October 1, 2024, has fundamentally altered the landscape for shareholders participating in these buybacks. Previously, companies bore a 20% tax on buybacks, leaving shareholders exempt. But now, any amount you receive from selling your shares back to the company is fully taxable in your hands, treated as dividend income. This seemingly minor change carries substantial implications, turning what once appeared to be a straightforward profit opportunity into a potential tax quagmire.
The reason for this dramatic shift lies in how the new tax provisions are structured. Under the revised rules, the entire amount you receive from a buyback is taxed as dividend income, subject to your marginal tax rate – which could be as high as 35% or more for high-income earners. While you can claim a capital loss for the original cost of your shares, the tax benefit from this loss is far lower, typically around 15%, as it can generally only be offset against long-term capital gains. This creates a significant disparity. For instance, consider a scenario where a company offers to buy back shares at ₹1,800, while the market price is ₹1,500. While the buyback price looks more attractive on paper, the tax bite can be severe. Analysis shows that after accounting for the higher dividend tax on the buyback amount versus the lower capital gains tax on selling in the open market, an investor could actually end up with significantly less cash in hand by participating in the buyback – potentially leaving thousands of rupees on the table.
What does this mean for you as an investor? Simply put, a higher buyback price no longer automatically translates into higher post-tax returns. Before participating in any share buyback offer, it is crucial to perform a thorough tax calculation. Compare the post-tax proceeds from selling your shares in the open market against the post-tax amount you would receive from the buyback. Unless you have substantial business losses or other specific income losses to offset against dividend income, selling your shares directly in the market, even at a lower nominal price, might often prove to be the more financially savvy decision. Always consult with a financial advisor to understand the specific implications for your portfolio and ensure your investment decisions are tax-efficient.
