Share Buybacks: Tax-Free for You, Not for the Company

Until September 2024, share buybacks were the cleanest exit: company paid 23.3% Buyback Distribution Tax, shareholder got the cheque tax-free. Budget 2024 flipped it. Effective 1 October 2024, buyback proceeds are treated as deemed dividend. Taxed at the shareholder's slab rate with no cost offset at the dividend stage. The TCS and Infosys buybacks that used to trigger IPO-like subscription rushes have quietly become a far less attractive corporate action. But the cost of acquisition gets a second life as a capital loss. A softening that matters.

By the end, you will know the pre-October-2024 vs post-October-2024 treatment and the capital-loss offset that softens the new rule for most investors.

The flip. October 2024

Pre-Oct 2024

Tax-free to shareholder

Company paid 23.3% BBT under section 115QA

Post-Oct 2024

Slab rate on full proceeds

Deemed dividend; no cost offset at dividend stage

The switch was announced in Budget 2024 and came into effect 1 October 2024. Buybacks announced before but implemented after that date fall in the new regime unless grandfathered in the notification. Companies rushed their buyback processes in August-September 2024 to catch the old regime; those slipping into October got the new regime applied retroactively at the shareholder level.

The capital-loss rescue

Budget 2024 softened the blow: the original COST OF ACQUISITION of the tendered shares can be claimed as a CAPITAL LOSS in the same year, usable against other capital gains (STCG and LTCG per normal offset rules). So tax leakage = full proceeds at slab MINUS (tax savings from using the cost as capital loss). For a 30%-slab investor who also has Rs. 1L+ equity LTCG to offset, the effective leakage is around 15-18%, not the full 30%. For a 0%-slab investor (below taxable threshold), the capital loss has no offset-in-year value but can be carried forward 8 years.

Worked example: Ritesh tenders shares bought for Rs. 80,000 to TCS buyback at Rs. 1,20,000 proceeds in November 2024. Deemed dividend income = Rs. 1,20,000, taxed at 30% slab = Rs. 37,440 tax (incl cess). Capital loss = Rs. 80,000 original cost, usable against other capital gains. If Ritesh has Rs. 80,000 of equity LTCG elsewhere, that LTCG is wiped out. Tax saving = Rs. 10,000 (12.5% of Rs. 80k). Net leakage = Rs. 37,440 - Rs. 10,000 = Rs. 27,440 = 22.9% of proceeds. Higher than pre-Oct-2024 (zero), lower than the headline 30%.

Buyback types and the regime

Both buyback modes. Tender-offer (you apply, company picks pro-rata) and open-market (company buys on exchange). Fall under the new deemed-dividend rule. The "open-market" name is misleading; for tax purposes, proceeds received from the company (via exchange) are treated as dividend. Shares sold to another investor in the open market (no company participation) remain regular STCG / LTCG and are STT-paid = 20%/12.5% concessional rates.

Capital loss preserved for 8-year carry-forward

Even if you cannot utilise the capital loss in the buyback year (no other capital gains), carry forward 8 years under section 74. Document the acquisition cost carefully. Broker contract notes, demat entry dates. This loss is worth real money years later.

Tender-option and open-market buybacks both count

Whether the buyback is tender-offer or open-market, deemed-dividend rule applies equally from Oct 2024. Open-market exchange trades between investors (no company role) remain regular capital gains.

Pre-Oct-2024 buybacks. Old regime frozen

Buybacks where tendering window closed before 1 Oct 2024: company paid 23.3% BBT (section 115QA), shareholder got tax-free proceeds. Any post-30-Sep settlements still fall in old regime if the trigger date is earlier. Check specific notification for your company.

Private companies + unlisted buybacks

Section 115QA originally applied only to listed companies. For unlisted buybacks, the treatment has been shareholder-side deemed dividend for years. Budget 2024 harmonised listed + unlisted under the same rule. Listed shareholders now face what unlisted shareholders always did.

Key Takeaways

Pre-1-Oct-2024 buybacks: tax-free to shareholder; company paid 23.3% BBT.
Post-1-Oct-2024: deemed dividend at shareholder slab rate + 4% cess.
Cost of acquisition becomes capital loss. Usable against other capital gains or carry forward 8 years.
Effective leakage: ~15-25% for 30%-slab with capital gains to absorb the loss.
Both tender-offer and open-market buybacks are in the new regime; exchange P2P sales remain regular STCG/LTCG.