Taxation of Buyback of Shares

A share buyback, also called a repurchase, occurs when a listed or unlisted company buys back its own equity securities from existing shareholders. The purpose may be to return surplus cash, improve earnings per share, or provide an exit option for early investors.

Under SEBI (Buy‑Back of Securities) Regulations, 2018, a company must obtain shareholder approval, disclose the buyback price, and adhere to a maximum limit of 25% of its paid‑up share capital in a financial year. The buyback price is usually set at a premium to the market price to incentivise shareholders.

For the NISM exam, remember that a buyback creates a taxable event for both the company (through a buyback tax) and the shareholders (through capital gains). Exam questions frequently present a scenario and ask you to identify the correct tax rate or the party responsible for tax deduction at source (TDS).

• The buyback is a one‑time transaction, not a regular dividend.
• All buyback proceeds are considered a sale of shares for tax purposes.

The company that initiates a buyback is subject to a statutory tax of 2% of the total buyback consideration. This tax is payable to the government on the day the buyback is executed and is separate from the corporate income tax already levied on profits.

In addition to the 2% buyback tax, the company must also pay Securities Transaction Tax (STT) on the buyback price, similar to the STT payable on a normal market sale. The STT rate for buybacks of listed shares is 0.1% of the buyback consideration, while for unlisted shares the rate is 0.05%.

Failure to deduct and remit the 2% tax or the applicable STT can attract penalties under the Income Tax Act and SEBI regulations. The exam often tests your knowledge of these rates, so memorise the 2% figure and the STT percentages for listed versus unlisted securities.

For a shareholder, the buyback is treated as a sale of shares. The profit (or loss) is the difference between the buyback price received and the cost of acquisition (including brokerage, stamp duty, and other expenses). This profit is subject to capital gains tax under the Income Tax Act.

The holding period determines the applicable tax rate. If the shares were held for 12 months or less, the gain is classified as short‑term capital gain (STCG) and taxed at 15% plus applicable cess. If the holding period exceeds 12 months, the gain is a long‑term capital gain (LTCG) taxed at 10% plus cess (subject to indexation for unlisted shares).

When the buyback involves listed equity shares, the shareholder can claim a rebate of the STT paid on the buyback price. This rebate reduces the overall tax outflow, a detail frequently asked in scenario‑based questions.

When the buyback involves listed shares, STT is levied at 0.1% of the buyback price, and the shareholder can claim a full rebate of this STT while computing capital gains tax. The tax rates (15% STCG, 10% LTCG) remain the same as for any other sale of listed equity.

For unlisted shares, STT is not applicable because the transaction occurs off‑exchange. Consequently, there is no STT rebate, and the capital gains tax is calculated solely on the gain. Additionally, for unlisted securities, the LTCG rate may be reduced to 5% if the shares are held for more than 24 months, subject to indexation benefits.

Exam candidates should remember to check the share classification first, as it determines whether STT and its rebate are part of the calculation.

The company must deduct TDS at the applicable capital gains rate before crediting the buyback amount to the shareholder's demat account. The TDS details are reported in Form 26Q and the shareholder receives Form 16A for the financial year.

Shareholders must disclose the buyback transaction in their income tax return under the "Capital Gains" schedule. The cost of acquisition, date of purchase, and expenses must be accurately recorded to avoid scrutiny.

Advisors should verify that clients have received the TDS certificate and that the buyback is reflected correctly in the client’s portfolio statements. Missing documentation is a frequent cause of audit adjustments.

Advisers must assess the tax impact of a buyback before recommending participation. For short‑term holders, the 15% tax may outweigh the premium offered, whereas long‑term holders benefit from the lower 10% rate and STT rebate.

Advisers should also consider the client’s overall tax bracket, the availability of capital loss set‑off, and the timing of the buyback relative to other transactions in the same financial year.

Regulatory compliance is crucial: advisers must ensure that the client receives the correct TDS certificate and that the buyback is correctly recorded in the client’s tax filings. Failure to do so can lead to penalties for both the adviser and the client.