The Finance Act (No. 2), 2024, which comes into effect on October 1, 2024, brings major changes to the tax treatment of share buybacks by domestic companies in India. Here’s a breakdown of what has changed:

Old Rules (Before October 1, 2024):

• When a company bought back its own shares, it had to pay an additional tax under Section 115QA of the Income Tax Act.
• This tax rate was 20%, plus additional surcharges and education cess, which brought the total tax rate to 23.296%.
• The tax was paid by the company, not the shareholders.

New Rules (Effective from October 1, 2024):

• Tax Burden Shifted to Shareholders: After the amendments, the responsibility to pay tax on share buybacks moves from the company to the shareholders.
• The payment shareholders receive when the company buys back their shares will now be treated as dividend income under Section 2(22)(f) of the Income Tax Act.
• This income will be taxed in the hands of the shareholders as "Income from Other Sources".

Key Changes:

• Amendment to the Definition of Dividend (Section 2(22)):
• A new clause, Clause (f), has been added to define payments made by a company when it buys back its own shares as dividend income.
• This means that the money shareholders receive from buybacks will now be treated just like regular dividend payments.
• Amendment to Section 115QA (Tax on Buyback):
• The earlier provision that required companies to pay tax on share buybacks under Section 115QA will no longer apply for buybacks that happen on or after October 1, 2024.

 

Tax Deducted at Source (TDS):

• Companies will now need to deduct TDS (Tax Deducted at Source) on payments made to shareholders during a buyback:
• For resident shareholders, the TDS rate will be 10% under Section 194.
• For non-resident shareholders, TDS will be at applicable rates or as per Double Taxation Avoidance Agreements (DTAA) under Section 195.
• Shareholders’ Tax Implications:
• Dividend Income: The proceeds from a buyback will be taxed as dividend income in the hands of the shareholders.
• Capital Loss: Shareholders can treat the original cost of the shares they sold back to the company as a capital loss. This capital loss can be carried forward for up to eight years to offset gains in future years.

Summary of Key Impacts:

For Companies: They no longer have to pay the 23.296% tax on buybacks after October 1, 2024. Instead, they must deduct TDS on payments to shareholders.
For Shareholders: The amount they receive from a buyback will be treated as dividend income and taxed accordingly. They also gain the benefit of carrying forward any capital loss for eight years.