In simpler terms, buyback of shares means buying by a company of its own shares in accordance with the provision of the law.
Taxability on buyback of shares is divided into
Buyback by Listed Companies
Buyback by Unlisted Companies
Buyback by Listed Companies:
a. Taxability in hands of companies: Buyback of shares by listed companies is not taxable in the hands of companies.
b. Taxability in hands of shareholders: It depends on the type of buyback offered by company. The buyback is classified into two categories:-
i) Buyback directly from shareholders: Gain arising to the shareholder shall be taxable in their hands as: –
Short-term capital gain (holding period less than 12 months): It shall be taxable as per Section 48 of the Income Tax Act, at the applicable slab rate of the shareholder based on his income. i.e 5/20/30%. No benefit of the flat tax rate of 15% is available under Section 111A as this transaction is not chargeable to securities transaction tax (STT).
Long-term capital gain (if the holding period is more than 12 months): It shall be taxable under Section 112 of Income Tax Act, at the rate, lower of the following:-
20% of capital gain after indexation
10% of capital gain without indexation
No benefit of exemption of capital gain upto Rs 1,00,000 is available under Section 112A as this transaction is not chargeable to securities transaction tax (STT).
ii) Buyback via Recognised Stock Exchange: Gain arising to the shareholder shall be taxable in their hands as: –
Short-term capital gain (If the holding period is less than 12 months): Capital gain is taxable at a flat rate of 15% under Section 111A as this transaction is chargeable to securities transaction tax (STT).
Long-term capital gain (if the holding period is more than 12 months): Capital gain exceeding Rs 1,00,000 shall be chargeable to tax at a flat rate of 10% under Section 112A as this transaction is chargeable to securities transaction tax (STT). However, this benefit is only available when the acquisition of shares was also chargeable to STT otherwise it shall be taxed as buyback was made directly from the shareholder.
Buyback by Unlisted Companies
a. Taxability in hands of companies: Buyback of shares by unlisted companies is taxable under Section 115QA of the Income Tax Act at a flat rate of 20% on the ‘distributed income’.
''Distributed income means the consideration paid by the company on buyback of shares as reduced by the amount which was received by the company for the issuance of such shares.''
This is an additional tax which will be over and above the tax chargeable in respect of total income of the unlisted company notwithstanding that no income tax is payable by the company under the provision of Income Tax Act
The tax on distributed income shall be treated as the final payment of tax and no further credit shall be claimed by the company or by any other person in respect of the amount of tax so paid.
No deduction under any other provision of Income Tax shall be allowed to the company or shareholder in respect of the income which has been charged to tax under Section 115QA.
b. Taxability in hands of shareholders: Receipts in the hands of shareholder is exempt under Section 10(34A) of Income Tax Act.