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Capital Gains on Buy Back of Shares

Rahul (SMF) (24 Points)

25 March 2010

Can anyone please tell me if Capital Gains Tax is applicable on buy-back of shares at face value in the case of a private limited company? And if its applicable, on what basis?

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13 Replies

Amir (Learner) (4016 Points)
Replied 25 March 2010

Dear Sir,

No special treatment in case of Buy Back just a usual transfer.

Sec 46A -speaks about the taxability in case of Buy Back Of Shares in the hands of Shareholders.

Now in ur case, the Company is purchasing back its own shares on Face Value so Face Value will be treated as "Sales Consideration"

"Issue Price" will be the "Cost of Acquisition"".

If Period of holding exceeds 12 months then the gain/loss will be Long Term otherwise Short Term.

In case of Long Term indexation can be done.

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CA Shiv (Business Controller) (2987 Points)
Replied 25 March 2010

Agrreeee with Amir......

also consider tht LTCG will be exempt.....

Amir (Learner) (4016 Points)
Replied 25 March 2010

Dear Shivang Sir,

With due respect I would like to remind u that STT is not charged in case of Buy Back of shares..and LTCG will not be exempt in this case..

STT is charged in case of buy back of Units of Equity Oriented Mutual Funds

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Aditya Maheshwari (CA in Practice) (35852 Points)
Replied 25 March 2010

Yes if there is a gain in the buyback then the same will be liable for taxation under short term capital gains or long term capital gains as the case may be.

In case the shares are purchased at face value and now being sold at face value only then no gain or loss if shares held for less than 1 year and in case of long term indexation will be allowed and the indexed value less the sale value will be LTC Loss to be set off against other LTCGains (except exempt u/s 10(38)).

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Max Payne (employed) (2569 Points)
Replied 25 March 2010

Can someone tell if STT is applicable on transfers outside stock exchanges?

Cos to my knowledge, STT is not applicable (I could be wrong :P)

Private companies dont obviously get their share transfers thru stock exchanges..... so i dont see how the exemption for LTCG us 10(38) or special rate will arise u/s 111A....

Agree with Amir Bhai's computation.....

Aditya Maheshwari (CA in Practice) (35852 Points)
Replied 25 March 2010

STT is not applicable on transfers outside stock exchanges

Kaushik Vankadkar (Service) (350 Points)
Replied 26 March 2010

Buy back shall be treated as normal capital gains transaction and hence there are two porssibilities either short term or long term. No stt is charged as these are not through stock exchange and hence no question of exemption under 10(38).

STT is charged when you trade through stock exchange.

Sohil (Learner) (631 Points)
Replied 29 March 2011

Sorry for bumping the thread.

The point i want to ask is I know no STT is charged. STT charge helps to reduce stcg from 30% on shares to 15% i heard somewhere.Now since no STT paid wont the profit be taxed at higher level?

e.g i bought 15 shares of a company some 6-8 months back.And now the comapny accepted 4 shares from me at 600 per share.Hence i make 20 rs per share profit and i fall under 20% tax bracket so what will be my liability?

U S Sharma (glidor@gmail.com) (21051 Points)
Replied 31 March 2011

Originally posted by : Magnet
	Sorry for bumping the thread. The point i want to ask is I know no STT is charged. STT charge helps to reduce stcg from 30% on shares to 15% i heard somewhere.Now since no STT paid wont the profit be taxed at higher level? e.g i bought 15 shares of a company some 6-8 months back.And now the comapny accepted 4 shares from me at 600 per share.Hence i make 20 rs per share profit and i fall under 20% tax bracket so what will be my liability?

under this case the stcg will be added to net taxable profit, and would be taxed accordingly.

Sohil (Learner) (631 Points)
Replied 09 April 2011

I just read on another site

Whenever there is a large change in shareholding of any company, small investors are given an opportunity to exit their stocks. This could be due to promoters wanting to delist their shares or non-promoters increasing their stake beyond 15%. The exit route provided to small investors is known as open offer. Generally open offer is for 20% of the equity of the company. The price for open offer should not be below the average price for the last 26 weeks.
There are many investors who get confused whether to tender their shares in open offer or not. This question needs to be answered from case to case basis. Though, we would like to point out one finer fact that would make this decision very easy to take!
Now, If you tender shares in open offer, you will have to pay income tax according to your tax slab if shares sold in within a year of buying. If you tender shares, which are more than a year old that will attract 20% tax with indexation benefit and 10% tax without indexation.
We all know that if shares sold in market after holding it for more than year does not attract any tax. If it is sold before a year it attracts just 15% of the tax.
Wallah…there lies the crux to the answer to our question.
So, whenever the price surges on announcement of the open offer, investors needs to calculate what is the most tax efficient thing to do. The net price investor’s realize in selling their long term holding in the market, is much more tax efficient than tendering the share in the open offer.
More often than not, price of the stock falls after the open offer is over and that will give an opportunity to buyback the same shares at a lower rate!

Is it true?

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Jatin Jindal (CA) (82 Points)
Replied 15 July 2011

Two question arises:

1. Are shares treated as capital assets?

2.Buy back constitutes transfer or not?

If any one has any judicial ruling on the above issue then please send me at cajatinjindal @ yahoo.com

Regards

Jatin

9873444054

saurabh jain (Audit Specialist) (271 Points)
Replied 06 September 2012

Originally posted by : Jatin Jindal
	Two question arises: 1. Are shares treated as capital assets? 2.Buy back constitutes transfer or not? If any one has any judicial ruling on the above issue then please send me at cajatinjindal @ yahoo.com Regards Jatin 9873444054

Jatin,

answer to your question

1. Yes, it is capital asset, as Income tax itself gives the exemption under section 46 for the capital gains accrued on the buyback of shares and capital gains arises only on sale of capital asset. so, shares are capital asset. But , if you are into business of stock broker and shares are part of stock than it is not a capital asset it is your routine business

2. Buy back is considered as transfer of assets, because in buyback there is extinguishment of right in lieu of consideration and extinguishment also comes under the definition of transfer.

Law Aspire (CS) (755 Points)
Replied 07 June 2013

As per finance Act,2013, A new Chapter XII-DA is inserted, which talks about special Provisions relating to tax on Distributed Income of Domestic Company For Buy Back of Shares.

New Section 115QA which states that company will have to pay tax on distributed Income.

As per explanation to the section> Distributed Income= Consideration Paid on Buy Back LESS amount received at the Time of Issue of Shares

Can anyone clarify that if shares were originally issued at Premiun , will that amount will also be reduced from Consideration paid on Buy Back.

Please explain with Example.