Know tax implications of stock buybacks

IIf 2021 was the year of IPOs, 2022 was the year of buybacks. More than 50 companies announced buybacks worth Rs.37,519 crore during the year. After TCS and Bajaj Auto, the latest to join the bandwagon has been One97 Communication, Paytm’s parent company. Last week, it announced an Rs.850-crore open market buyback, with a maximum price of Rs.810 per share. Earlier this month, Infosys also rolled forth its Rs.9,300 crore openmarket buyback.

On the face of it, buybacks may seem lucrative to shareholders. Since the decision affirms the company’s underlying faith in its potential, markets respond positively. Share prices move up in the short run. The company is seen as cashrich, looking to bolster shareholder value in absence of good investment opportunities. It also boosts popular investor metrics like earnings per share (EPS), given that buybacks reduce the number of available shares in the market.

However, there are tax implications shareholders cannot ignore. Buybacks happen either through the direct tender offer or the open market. In the tender offer route, individual stockholders incur no tax liability on gains from the buyback. A tender offer gives you the option to sell the shares directly to the company, your entire stakeholding, or a portion of it, at a price higher than market value, within a specific time window.

However, the company undertaking such repurchase has to pay a 20% tax, plus surcharges on the distributed income, which is the difference between the buyback and issue prices. For example, you hold 100 shares of Sigma Co, which wants to repurchase 10,000 shares at a market price of Rs.600 per share. The issue price was Rs.100 per share. On the proceeds of Rs.50 lakh the company will have to pay 20% buyback tax, plus other applicable charges. But your income from the buyback—Rs.50,000—will remain tax-free. Mumbai-based chartered accountant Nitesh Buddhadev says this route is advantageous to investors. “This income is tax-free in the hands of shareholders so investors stand to gain more from a tender Offer.”

The double-taxation whammy

The picture changes with the open market route, which most companies choose. “That’s when things get tricky,” says Buddhadev. Here, companies purchase their stocks through exchanges over an extended period. While the tax treatment does not change for corporates, the income from buyback becomes taxable in the hands of shareholders.


In the open market route, the anonymity of buyers makes it difficult to gauge whether a trader’s buying/selling is part of any buyback activity or not. This means that both the company and the shareholder end up taxed for the gains from the transaction. This is one reason why the Securities and Exchange Board of India (Sebi) wants to pull the plug on the open market buyback route by April 2025.

Noida-based chartered accountant Yatin Vashistha explains, “Since the exchange does not distinguish between an investor’s buyback trades and other regular transactions, all transactions are subjected to long-term and short-term capital gains tax as applicable.”


Again for instance if Sigma Co. chooses the open-market route, there will be different tax implications for you the shareholder, who has earned Rs.50,000 from the buyback. If the shareholder sells his stock within 12 months of purchase, the gains will be treated as short-term capital gains and taxed at 15%. If held for more than 12 months, gains will be long-term capital gains. There is no tax on gains up to Rs.1 lakh, but beyond this threshold, these are taxed at 10%.

For some investors, the flurry of buyback offers is an ideal opportunity to harvest tax losses. This involves selling at a loss and adjusting those losses against capital gains from other investments. Unadjusted losses can be carried forward for up to seven financial years.

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