New Tax Rules for Buy-Back of Shares by Domestic Companies

Last updated: 26 July 2024

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New tax regulations are being introduced for domestic companies buying back their own shares. From 1st October 2024, payments made to shareholders for these buy-backs will be treated as dividends and taxed at the shareholder's applicable income tax rate. While this income is taxable, shareholders will not be able to claim deductions against it. Importantly, the cost of acquisition for the bought-back shares will be considered nil for capital loss calculations, but any resulting capital loss can be carried forward and offset against future capital gains.

Tax on distributed income of domestic company for buy-back of shares Special provisions relating to tax on distributed income of a domestic company from buy-back of shares were introduced by Finance Act, 2013, in line with the then schema of dividend distribution tax. Prior to the amendments made by the Finance Act, 2020, a company had to pay dividend distribution tax (DDT), on the distributed profits by way of dividends in addition to the income-tax chargeable in respect of the total income fo

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FAQ :

These amendments will take effect from 1st October 2024 and will apply to any buy-back of shares that takes place on or after this date.

The sum paid by a domestic company for the purchase of its own shares will be treated as a dividend in the hands of the shareholders who receive the payment. This will be charged to income tax at the applicable rates.

No, no deduction for expenses shall be available against such dividend income when determining the income from other sources.

The cost of acquisition of the shares which have been bought back would generate a capital loss in the hands of the shareholder as these assets have been extinguished. The deemed value of consideration for these shares for the purpose of computing capital loss will be nil.

Yes, you will be entitled to claim your original cost of acquisition of all shares. The capital loss on buy-back can be carried forward and subsequently set off against consideration received on sale of other shares, thereby reducing capital gains.

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CCI News Desk

Finance news reporter covering taxation, GST, income tax, business compliance, and economy updates. I simplify complex financial topics into easy-to-understand articles for professionals, taxpayers, and business owners on leading finance and tax platforms.

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