INCOME TAX ON BUYBACK OF SHARES
INCOME TAX ON BUYBACK OF SHARES
TAXATION IN CASE OF BUY BACK
- What do you mean by Buy-back of shares?
Share or stock buyback is the price where companies decide to purchase their own shares from their existing shareholders either through a tender-offer or through an open market. In such a situation, the price of concerning shares is higher than the prevailing market price.
- Taxation in case of shares or other specified securities (other than shares of domestic company)?
In the hands of company: There is NO TAX treatment in hands of company.
In the hands of shareholder: As per Section 46A, Capital Gain is applicable in hands of shareholder.
Computation of capital gain
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Particulars |
Rs. |
|
Full value of consideration (Buy Back Price) |
xxx |
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Less: Cost of acquisition/ indexed cost of acquisition |
xxx |
|
Short term capital gain/ Long term capital gain |
xxx |
Period of Holding: Date of acquisition till date of Buy Back.
NOTE (amendment w.e.f. 01/10/2024):
Where Shareholders received consideration and it is treated as deemed dividend u/s 2(22)(f) then, full value of consideration shall be treated as NIL while calculating Capital Gain.
- Taxability in case of shares of domestic company (Buyback till 30th Sep. 2024)?
In hands of Company:
As per Section 115QA, Domestic company shall pay tax @ 23.296% (20%+12%+4%) on distributed income which shall be calculated as below:
Distributed Income = Buyback price – Issue Price (including premium).
NOTE:
Company is required to pay tax within 14 days from the date of distribution. Interest @ 1% p.m. or part of the month applicable form 15th day. Assessee will be treated as assessee in default if tax not paid.
Rule 40BB- Buy Back Rules for calculation of Issue Price
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S.NO |
Case |
Issue Price |
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Shares issued by a company on its subscription |
Amount actually received by the company (including Premium) |
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E.g. |
Tata ltd issued 10,000 shares on 10/07/2006 for Rs. 70 per share. Face value of the share was Rs. 10: In this case Issue Price will be Rs. 70. |
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Where prior to buy back, the company has returned any sum out of amount received. |
Amount received by the company as reduced by the sum so returned. If company paid DDT u/s 115-O on returned amount, then it shall not be reduced |
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E.g. |
Suppose in above example company paid Rs. 5 on 15/08/2015 then the issue price will be Rs. 65 and if DDT was paid on those Rs. 5 then the issue price will be Rs. 70. |
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Shares issued under ESOP or as a part of sweat equity |
whichever is lower.
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E.g. |
Kamal Ltd. issued 10,000 ESOPS at Rs. 40 per share (FV 10). FMV of shares is Rs. 70 per share. In this case issue price will be Rs. 70 lower of FMV or amount credited to share capital & premium account. |
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Shares are issued under a scheme of amalgamation, in lieu of share or share of an amalgamating company |
Amount received by the amalgamating company in respect of such shares |
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E.g. |
CCL ltd. issued 10,000 shares at Rs. 70 per share. CCL ltd amalgamated with DCL ltd and DCL ltd issued 20,000 shares to shareholders of CCL ltd. In this case Issue Price will be = 7,00,000/20,000 = Rs. 35 per share |
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In case of Demerger, shares issued by resulting company |
Amount received by demerged company in respect of original shares to be divided in ratio of net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger. |
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In case of demerger, in hands of demerged company |
Amount received shall be reduced by the amount determined in point 5 above. |
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E.g. |
Burger ltd have 2 divisions Burger & Beverages. Burger Ltd. issued 10,000 shares at Rs. 70 per share in P.Y 01-02. Burger Ltd demerged and transfer beverage division to Beverages Ltd. in P.Y 19-20. At time of demerger net worth of Burger Ltd was Rs. 500 crores. Net assets transferred to Beverages Ltd. is Rs. 200 crores. Beverages ltd issued 20,000 shares of F.V Rs. 10 to shares of Burger Ltd.
Shares of Beverages Ltd.: Rs. (7,00,000*200cr/500cr)/20,000 = Rs. 140 per share. Shares of Burger ltd.: (Rs. 7,00,000- Rs. 2,80,000)/ 10,000 = Rs. 42 per share. |
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Shares allotted or issued as a part of consideration for acquisition of any assets or settlement of liability |
Amount received = A/B. A: a) FMV of asset/ liab. b) Amount credited to share capital & security premium account Whichever is lower. B: No. of shares issued as a part of consideration.
NOTE: Where both shares and money is given the FMV of assets shall be considered only to the portion of consideration paid by shares. |
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E.g. |
Karun Ltd. acquired assets in lieu of issue of 10,000 shares. FMV of assets is Rs. 5,00,000. In this case issue price will be Rs. 50. |
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Shares issued or allotted on succession or conversion of firm into a company or succession of sole proprietary concern by the company |
Amoun received = (A-B)/C A= Book value of assets in B/S as reduced by TDS, TCS, Adv. Tax (except refund) & unamortized amount of deferred expenditure.
B= Book value of liabilities in the B/S as reduced by capital, reserves and surpluses, provisions for unascertained liabilities and contingent liabilities
C= Number of shares issued on conversion. |
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Bonus shares issued without consideration |
Nil |
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Shares issued on conversion of preference shares, bond or debentures, debenture stock or deposit certificate. |
Amount received by the company in respect of the instrument so converted.
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E.g. |
KB ltd. issued 10,000 bonds for Rs. 1000 per bond in F.Y 14-15. On 18/04/23 bonds convertible into shares and company allotted 2,00,000 shares in lieu of bonds. In this case Issue Price= 1crore/ 2 lakhs = Rs. 50. |
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Shares held in D-MAT Form, and which cannot be distinctly identified |
Amount received for issue of shares on the basis FIFO method. |
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In any other case |
Face value of the shares. |
Example for point 8 above.
Business of Mr. Rahul is transfer of Rahul Pvt. Ltd. and the company allotted 1,00,000 shares to Mr. Rahul (F.V Rs.10). Statement of Liabilities and assets as on date of succession is as follows:
|
LIABILITES |
ASSETS |
||
|
Particulars |
Rs. |
Particulars |
Rs. |
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Capital |
25,30,000 |
Building |
17,00,000 |
|
Provision for tax (Excess by Rs. 20,000) |
2,30,000 |
Goodwill
|
10,00,000 |
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Loan |
4,70,000 |
Furniture |
4,00,000 |
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Other liab. |
1,20,000 |
TDS/ TCS |
2,00,000 |
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Advance tax |
50,000 |
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TOTAL |
33,50,000 |
TOTAL |
33,50,000 |
Building transferred at Rs. 24,00,000. Calculate issue price of shares allotted to Mr. Rahul.
Issue Price of shares = (A-B)/C; 25,50,000/1,00,000= 25.50/share.
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A= Book value of assets |
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Building |
17,00,000 |
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Goodwill |
10,00,000 |
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Furniture |
4,00,000 |
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IT Refund (2,50,000- 2,10,000) |
40,000 |
|
B= Book value of Liabilities |
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Loan |
(4,70,000) |
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Other Liabilities |
(1,20,000) |
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Net Assets |
(25,50,000) |
In hands of Shareholders:
The amount received by shareholders on Buyback of shares shall be exempt u/s 10(34A) i.e. no tax treatment in hands of shareholders.
- Taxability in case of shares of domestic company (Buyback w.e.f. 01st Oct. 2024)?
In the hands of Company:
There is No Tax treatment in hands of company.
In the hands of shareholders:
Section 2(22)(f): Any payment by company on buy back of shares shall be treated as deemed dividend in hands of shareholders and it is taxable under Income from other sources as per normal tax rate.
Buy back is treated as extinguishment of rights so Capital gain is applicable as per Section 46A in the hands of shareholder.
Computation of Capital Gain
|
Particulars |
Rs. |
|
Full value of consideration (buy back price) |
Always Nil |
|
Less: Cost of acquisition of shares |
(xxx) |
|
STCL/ LTCL |
(xxx) |
Example: Mr. Kunal acquired 1,000 shares of Ril Ltd. @ Rs. 50 per share during P.Y 2020-21. Ril ltd buy back shares 300 shares @ 120 per share on 10/12/2024. Mr. Kunal sold 700 shares on 15/07/2025 @ Rs. 200 per share, Discuss tax treatment in hands of Mr. Kunal
During the P.Y 24-25. Rs. 36,000 (300 Shares * 120) is treated as deemed dividend in hands of Mr. Kunal as per Section 2(22)(f) & it is taxable under IFOS.
Computation of capital gain on buy back.
|
Particulars |
Rs. |
|
Full value of consideration |
Always Nil |
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Less: cost of acquisition (300 shares *50) |
(15,000) |
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LTCL (it can be set off against any other ltcg of c/f for next 8 years) |
(15,000) |
Computation of Capital gain on sale of 700 shares
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Particulars |
Rs. |
|
Full value of consideration |
1,40,000 |
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Less: Cost of acquisitions (700 shares * 50 shares) |
(35,000) |
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LTCG |
1,05,000 |
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LTCL B/F |
(15,000) |
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LTCG |
90,000 |
