I live in Dubai. I bought 5,000 shares in an Indian company three years ago at a valuation of ₹200 per share. Since the promoters want to ease out the investors, the company is now planning to buy shares back at ₹500 per unit in May 2025. Will I be liable to pay any buyback tax in India, or will the company discharge the tax liability on my behalf?
-Name withheld on request
Prior to amendments made by the Finance (No. 2) Act, 2024, a domestic company was liable to pay an additional income tax at 20% (plus applicable surcharge and cess) on the amount of distributed income (viz. buyback price less issue price of shares). Consequently, this amount was exempt from tax in the hands of the shareholders (both resident and non-resident).
With effect from 1 October 2024, an Indian company is no longer liable to pay any tax on the amount of income distributed by it via share buyback. The tax treatment has completely changed on account of the changes introduced vide the Finance (No. 2) Act, 2024.
As per the modifications made to the provisions of the Income Tax Act, 1961, the entire sum paid by an Indian company upon the buyback of its shares would now be treated as a dividend in the hands of its shareholders. Such a dividend would be charged to tax at the respective slab rates of the shareholders.
Further, no deduction of any purchase cost or other expenditure would be allowed against this dividend income. Instead, the extinguishment of rights would generate a capital loss equivalent to the cost of acquisition of the shares, with the sale consideration being deemed to be nil. It may be noted that the indexation benefit has also been removed under the law. The resulting capital loss could be set off against other capital gains earned either in the same fiscal year or in the subsequent eight fiscal years.
In your situation, the income would be ₹25 lakh, while the long-term capital loss amounts to ₹10 lakh. This loss can only be set off against other long-term capital gains.
For non-residents, both TDS and final tax are levied at a 20% rate (plus applicable surcharge and cess) under the ITA on dividends. However, since the income arising from the buyback is taxed as a dividend in the same manner under the ITA as an actual distribution of dividends, you are eligible to avail the benefits of Article 10 of the India-UAE Double Taxation Avoidance Agreement (DTAA), which provides for a reduced rate of taxation of 10% on the dividend income. This would be subject to fulfilling documentation requirements such as furnishing TRC and Form 10F.
Harshal Bhuta, is a partner at P.R. Bhuta & Co., Chartered Accountants.
