Taxation of amount received on buy-back of shares.

Dear Experts,

The assessee was holding small amount of equity shares in one multinational unlisted company. The shares are delisted since 2007. The company bought-back the shares in FY 2020-21, applied TDS @ 20% on the proceeds, and remitted the balance amount to the assessee. Both these amounts, ie the TDS & Gross amount, are reflecting in his Form 26 AS. As per the said Form, the TDS was done u/s 194. Despite his specific request, the Company informed by e mail that they will not issue the relevant Form 16. The valuation of the shares for buy-back purpose was done independently by two CA firms of national repute. The appropriateness of valuation is not the issue of this query.

QUERY- (i) Whether the buy-back proceeds are exempted u/s 10 (34A) in the hands of assessee (ii) Whether assessee can claim the credit of the said TDS.

Please oblige with your comments.

Thanking you in advance.

Hi V. P. Vidwans,

Here’s a clear breakdown of your query on taxation of buy-back proceeds of shares and TDS implications:

1. Taxability of Buy-Back Proceeds

When a company buys back its shares from a shareholder, the tax treatment depends on whether the company is listed or unlisted and the applicable sections of the Income Tax Act.
For buy-back of shares of an unlisted company, the buy-back tax provisions under Section 115QA apply:
- The company pays buy-back tax at 20% (plus applicable surcharge and cess) on the distributed amount.
- The buy-back proceeds received by the shareholder are exempt in the hands of the shareholder under Section 10(34A).
- This means the shareholder does not have to pay tax on the buy-back proceeds again.
Your case:
- Shares are in an unlisted company and were bought back in FY 2020-21.
- Hence, buy-back proceeds should be exempt under Section 10(34A).

2. TDS on Buy-Back Proceeds

Section 194 (which covers TDS on interest) is not the correct section for TDS on buy-back of shares.
The correct TDS section is Section 194Q (from 1 July 2021, applicable on purchase of goods over ₹50 lakh), but it’s not related here.
More appropriately, Section 115QA requires the company to pay tax on buy-back; no TDS is applicable on the buy-back proceeds to the shareholder.
If TDS was deducted by the company under Section 194, it appears to be a mistake or misclassification.

3. Claiming Credit of TDS

Since the TDS has been deducted and reflected in Form 26AS, you can claim credit of this TDS while filing your income tax return.
However, since the buy-back proceeds are exempt under Section 10(34A), you need to:
- Report the gross buy-back proceeds under exempt income,
- Report the TDS amount,
- Claim the credit of TDS,
- And since the income is exempt, the overall tax liability on this income will be nil,
- The TDS credit may be refunded if excess TDS is reflected as advance tax.

4. Recommended Actions

Get a written confirmation from the company about the TDS section under which tax was deducted.
File your return with:
- Proper disclosure of exempt buy-back income under Section 10(34A),
- TDS credit claim for the amount deducted under Section 194 (even if incorrect, it’s reflected in Form 26AS),
- Attach necessary documents for buy-back proof and valuation report.
If needed, you may write to the Income Tax Department explaining the situation and request a refund of excess TDS.

Summary

Question	Answer
Are buy-back proceeds exempt under Sec 10(34A)?	Yes, for unlisted companies with tax paid by company under Sec 115QA.
Can TDS deducted under Sec 194 be claimed?	Yes, claim credit of TDS deducted as per Form 26AS in your ITR.
Should you pay tax again on buy-back proceeds?	No, exempt under Section 10(34A).