In a big overhaul in the share buyback process, the gains of share buyback by shareholders will be treated like dividend and taxed from October 01, 2024. Finance Minister Nirmala Sitharaman announced that proposal to tax income received on buy back of shares in the hands of the recipient in the Union Budget 2024.
In simple terms, the shareholders will need to pay the tax on the gains from buyback of shares. Earlier, there was no tax on buy back of shares in the hands of recipient.
As the new change will be effective from October 01, many companies flooded buy back of shares in previous few months, especially in August and September.
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What’s Buyback of shares and what’s the purpose?
Share buyback is a corporate action in which the company repurchases its own shares from existing shareholders, usually at a premium. It’s a mechanism through which the company redistributes its reserves as form of capital to shareholders. This reduces the number of outstanding shares in the market and increase the value of existing shares.
There are several benefits of share buyback including return excess cash to shareholders, boost Earnings Per Share (EPS), support share price, increase ownership stake, and prevent hostile takeovers.
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How new rule will impact investors?
Previously, share buy back is a mechanism through which the company takes advantage of India’s tax regulation. This reason is as capital gains from share buyback isn’t taxed unlike dividend, making it more attractive to shareholders.
Investors pay tax on dividend income such as tax deduct at source (TDS) post a certain threshold.
Thereafter, the shareholders will need to pay taxes on gains of share buyback. So the company won’t easily use this mechanism to help shareholders avoiding taxes.
Companies will now bring share buyback if they feel its requirement in case of undervalued of stock. That signals confidence in its own prospects, that can help boost the share price.
