URGENT :Buy back of own unlisted shares by a Pvt Ltd Co.
This query is : Resolved
23 March 2011
We are a pvt ltd co & wants to buy back our own shares from our ex directors / ex-employees.
Suppose, these shares were issued 5 years ago @ 10/- & now we want to take it back @ 20/- each.
What will be the tax implications for both (pvt ltd co) & for ex- employees ??
Its urgent.
Thanks
Suppose, these shares were issued 5 years ago @ 10/- & now we want to take it back @ 20/- each.
What will be the tax implications for both (pvt ltd co) & for ex- employees ??
Its urgent.
Thanks
24 March 2011
Dear Subash Ji do you want to say that the company has been taken over. In that case the share is company held by earlier directors will be acquired by the new directors. No effect on company. In pvt ltd company no buyback is applicable. Only when the ownership changes the share will be transferred for consideration. Say In a pvt ltd company...X & Y r directors now the company has changed hands and A & B are new directors. In this case the new directors A & B will purchase the shares from X & Y for consideration and any gain will be treated as Capital Gain.
24 March 2011
Company has not been taken over.
Some of the ex employees & one ex director is still the shareholder of this company.
Now the company wants to offer them a price (original price was 10/-), of ...say 25/- for buying back those shares from them.
Now please clarify..
Some of the ex employees & one ex director is still the shareholder of this company.
Now the company wants to offer them a price (original price was 10/-), of ...say 25/- for buying back those shares from them.
Now please clarify..
02 August 2025
Got it, you want to understand the **tax implications of buyback of own unlisted shares by a private limited company** from ex-directors and ex-employees, where shares were originally issued at ₹10 and the buyback price is ₹20 or ₹25.
---
### 1. **Is Buyback Applicable for Private Limited Companies?**
* Under **Companies Act, 2013**, private limited companies **can buy back their own shares**, subject to certain conditions:
* Buyback must be authorized by the Articles of Association.
* Buyback must be within prescribed limits (max 25% of paid-up capital and free reserves).
* Must comply with Companies Act, Section 68 and relevant rules.
* So, **buyback is allowed** for Pvt Ltd companies.
---
### 2. **Tax Implications for the Private Limited Company (Buyer):**
* **Buyback of shares is not considered a taxable event for the company** itself.
* The company pays consideration to shareholders and reduces its capital accordingly.
* The company must comply with buyback provisions, including payment out of free reserves or securities premium account.
* The company should deduct **TDS on buyback** under Section 194 of the Income Tax Act (if applicable).
* TDS is generally applicable on dividend, but on buyback, TDS rules have specific applicability (check current provisions).
---
### 3. **Tax Implications for the Shareholders (Ex-Directors/Ex-Employees):**
* The amount received by shareholders on buyback is treated as **Capital Gains**.
* **Capital Gains Tax** depends on:
* **Period of holding:**
* If shares held for more than 12 months → Long Term Capital Gains (LTCG).
* If shares held for less than 12 months → Short Term Capital Gains (STCG).
* **Tax rate on LTCG for unlisted shares:**
* As per Section 112, LTCG is taxed at 20% with indexation.
* **Tax rate on STCG:**
* Taxed as per the shareholder's normal income tax slab.
* Since the shares were issued 5 years ago, this is LTCG for the shareholders.
* The gain is **Buyback price - Purchase price (₹25 - ₹10 = ₹15 per share)**.
* Shareholders must report this gain and pay capital gains tax accordingly.
---
### 4. **Other Considerations:**
* If the buyback price is more than the fair market value (FMV), the Income Tax Department may question the valuation.
* Ensure proper valuation is done and documented.
* The company should keep records and comply with buyback rules under the Companies Act and Income Tax Act.
---
### Summary:
| Party | Tax Implication |
| ----------------------------------------- | ----------------------------------------------------------------------------- |
| **Private Ltd Company** | No tax on buyback; comply with Companies Act. |
| **Ex-Directors/Employees (Shareholders)** | Capital Gains tax on buyback amount minus original cost (likely LTCG at 20%). |
---
If you want, I can help draft a simple calculation sheet for capital gains or outline the procedural steps for buyback compliance. Would that help?
---
### 1. **Is Buyback Applicable for Private Limited Companies?**
* Under **Companies Act, 2013**, private limited companies **can buy back their own shares**, subject to certain conditions:
* Buyback must be authorized by the Articles of Association.
* Buyback must be within prescribed limits (max 25% of paid-up capital and free reserves).
* Must comply with Companies Act, Section 68 and relevant rules.
* So, **buyback is allowed** for Pvt Ltd companies.
---
### 2. **Tax Implications for the Private Limited Company (Buyer):**
* **Buyback of shares is not considered a taxable event for the company** itself.
* The company pays consideration to shareholders and reduces its capital accordingly.
* The company must comply with buyback provisions, including payment out of free reserves or securities premium account.
* The company should deduct **TDS on buyback** under Section 194 of the Income Tax Act (if applicable).
* TDS is generally applicable on dividend, but on buyback, TDS rules have specific applicability (check current provisions).
---
### 3. **Tax Implications for the Shareholders (Ex-Directors/Ex-Employees):**
* The amount received by shareholders on buyback is treated as **Capital Gains**.
* **Capital Gains Tax** depends on:
* **Period of holding:**
* If shares held for more than 12 months → Long Term Capital Gains (LTCG).
* If shares held for less than 12 months → Short Term Capital Gains (STCG).
* **Tax rate on LTCG for unlisted shares:**
* As per Section 112, LTCG is taxed at 20% with indexation.
* **Tax rate on STCG:**
* Taxed as per the shareholder's normal income tax slab.
* Since the shares were issued 5 years ago, this is LTCG for the shareholders.
* The gain is **Buyback price - Purchase price (₹25 - ₹10 = ₹15 per share)**.
* Shareholders must report this gain and pay capital gains tax accordingly.
---
### 4. **Other Considerations:**
* If the buyback price is more than the fair market value (FMV), the Income Tax Department may question the valuation.
* Ensure proper valuation is done and documented.
* The company should keep records and comply with buyback rules under the Companies Act and Income Tax Act.
---
### Summary:
| Party | Tax Implication |
| ----------------------------------------- | ----------------------------------------------------------------------------- |
| **Private Ltd Company** | No tax on buyback; comply with Companies Act. |
| **Ex-Directors/Employees (Shareholders)** | Capital Gains tax on buyback amount minus original cost (likely LTCG at 20%). |
---
If you want, I can help draft a simple calculation sheet for capital gains or outline the procedural steps for buyback compliance. Would that help?
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