TDS deduction by company for payment for buyback shares

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C R (Querist)
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15 February 2024 Good Day.
When a company buyback the unlisted shares, is it required to deduct any tds from the amount payable ?
I understand company has to pay tds for buyback but not clear if company is required to deduct any tds while paying to shareholders of such unlisted shares .
Please help with the correct position in this regard.
Thanks

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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11 July 2024 When a company conducts a buyback of unlisted shares from its shareholders, the tax implications are as follows:

1. **Tax on Buyback by the Company:**
- The company is required to pay a tax known as buyback tax under section 115QA of the Income Tax Act, 1961. As of the latest provisions, this tax is applicable at the rate of 20% (plus applicable surcharge and cess) on the distributed income arising from the buyback of shares.

2. **TDS (Tax Deducted at Source) by the Company:**
- As per the Income Tax Act, there is no requirement for the company to deduct TDS from the amount payable to shareholders when conducting a buyback of unlisted shares. The TDS provisions under various sections such as 194A, 194H, 194I, etc., apply to specific types of payments such as interest, commission, rent, etc., but not typically to buyback transactions.

3. **Tax Implication for Shareholders:**
- Shareholders who receive consideration from the buyback of shares need to consider the tax implications based on their individual circumstances. The buyback amount received is subject to capital gains tax under section 45 of the Income Tax Act.
- The tax treatment for shareholders depends on whether the shares were held as a capital asset or as stock-in-trade, and whether they qualify for any exemptions or deductions under the provisions of the Act.

4. **Compliance Requirements:**
- While the company does not need to deduct TDS on buyback payments, it is important for the company and shareholders to comply with all reporting requirements related to the buyback transaction, including filing of appropriate forms and disclosures with the Income Tax Department.

In conclusion, while the company conducting a buyback of unlisted shares is liable to pay buyback tax, there is no requirement under current tax laws for the company to deduct TDS from the amount payable to shareholders for buyback of unlisted shares.

C R

C R (Querist)
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11 July 2024 The company had paid the buyback amount to shareholders and has treated the amount paid as dividend and hence deducted the tds@10% from the payment made. The TDS certificate issued by company also indicates the paid amount as dividend. is it right from tax point of view. ?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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27 July 2025 Great follow-up question!

Here’s the clear position regarding **TDS deduction on buyback payments to shareholders** and the issue of treating buyback payment as dividend:

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### 1. **Buyback of Shares & Taxation (Section 115QA)**

* When a company buys back shares (especially **unlisted shares**), it pays a **buyback tax** under **Section 115QA** on the distributed income.
* The buyback amount paid to shareholders is **not treated as dividend** under this section.
* The tax liability is on the **company**, not on the shareholders in terms of TDS deduction at source.

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### 2. **TDS Deduction by Company on Buyback**

* **No TDS is required to be deducted on buyback consideration paid to shareholders.**
* The buyback payment is a **capital receipt** for the shareholder (subject to capital gains tax in their hands).
* Provisions like TDS under Section 194 or 194A, 194H, etc. do not apply to buyback payments.

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### 3. **If Company Treated Buyback Payment as Dividend and Deducted TDS @10%**

* This is **incorrect** from the tax law perspective.
* Buyback consideration is **not dividend income** but a capital receipt.
* Hence, TDS under **Section 194** (on dividends) should not be deducted on buyback.
* Treating it as dividend and deducting TDS @10% may lead to complications, including possible claims for refund by shareholders.

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### 4. **What Should Be Done If TDS Is Deducted Incorrectly?**

* The company should issue TDS certificates clearly stating the nature of payment.
* The shareholders can claim refund of the incorrectly deducted TDS while filing their income tax returns.
* The company should ideally rectify the mistake and issue revised TDS certificates if possible.
* Consult with tax advisors and consider filing a rectification with the Income Tax Department if required.

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### **Summary**

| Aspect | Correct Position | If Company Treated as Dividend |
| ------------------------- | -------------------------------------------------- | ------------------------------------------------------ |
| Taxability of Buyback | Tax on company under Section 115QA | Incorrect treatment |
| TDS Deduction Requirement | **No TDS required** on buyback payment | TDS @10% deducted incorrectly |
| Shareholder Tax Treatment | Capital gains tax applicable on buyback amount | May cause confusion; dividend tax rules not applicable |
| Remedy | No TDS; follow buyback tax and capital gains rules | Shareholder to claim refund; company to rectify |

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If you want, I can help draft an explanation letter or formal communication for your company or shareholders on this.

Would you like that?

C R

C R (Querist)
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27 July 2025 Thanks for reply. But it is one year late.i wanted the clarification last year in July while filling return for the year ended 31.03.24. already had to treat in it as tds on dividend and claimed the refund based on total taxability from all sources. The company here was reliance retail who paid it as dividend. I wonder why no such issue came up last year as I am sure many would have been impacted. Also for a company of reliance , could they go so wrong to treat it as dividend and deduct tds ? Surely they might have a different interpretation by treating buyback payment as dividend thereby by paying off tax after deducting from shareholders ? Thereby saving their money to pay off tax and using TDS deducted to pay it off ? Interesting ?

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