Symmetry, at what cost? How India’s buyback tax tilts the scales

India's financial landscape has witnessed a significant shift in the taxation of share buybacks, a move designed to create symmetry with dividend taxation but one that has inadvertently tilted the scales for investors. Effective October 1, 2024, the tax burden for share buybacks shifted from companies to shareholders, a change stemming from the Union Budget 2024. This transition has far-reaching implications for companies, shareholders, and overall market dynamics, prompting a reassessment of capital distribution strategies.

The Old Regime: A Company's Burden

Before October 1, 2024, Indian companies undertaking share buybacks were subject to a 20% tax on their distributed income, as per Section 115QA of the Income Tax Act. Distributed income was calculated as the difference between the buyback price and the original issue price of the shares. Shareholders, on the other hand, received these buyback proceeds tax-free. This system meant that the company bore the tax burden, making buybacks an attractive option for shareholders seeking returns.

The New Order: Shifting the Scale

The Finance Act, 2024, ushered in a new era by abolishing the buyback tax for companies. Instead, the proceeds from buybacks are now treated as "deemed dividends" and taxed in the hands of the shareholders at their applicable income tax slab rates. Companies are now responsible for withholding tax at source on such payments. This change aligns the taxation of buybacks with that of dividends, where the recipient is taxed based on their income slab.

Winners and Losers in the New System

The revamped tax regime has created a clear distinction between winners and losers. Previously, shareholders were exempt from tax on buyback proceeds, but now they face taxation at their marginal income tax rates, which can be as high as 30% or more. Moreover, the cost of acquisition of shares is treated as a capital loss, which can only be offset against future capital gains, potentially limiting its utility.

However, non-resident shareholders may find some advantages due to India's tax treaties with other countries. These treaties often provide lower tax rates on dividend income, potentially making buybacks more appealing for foreign investors. For instance, treaties with countries like the UK and Mauritius offer tax benefits with rates as low as 5% to 15%.

Impact on Market Dynamics

The shift in buyback taxation has significantly impacted market dynamics. According to PrimeDatabase, the number of share buyback offers plummeted to just four, totaling ₹186 crore, as of June 26, 2025, compared to 38 offers with a total value of over ₹8,000 crore in the previous year. This decline suggests that companies are re-evaluating buybacks as a means of returning capital to shareholders.

Pranav Haldea, MD of Prime Database Group, noted that buybacks have "completely dried up" since the taxation rule change. He added that companies that were considering buybacks may have accelerated their plans to launch them before the new rules took effect.

SEBI's Regulatory Role

In addition to the tax changes, the Securities and Exchange Board of India (SEBI) has also played a role in the decline of buybacks. SEBI has progressively reduced the option for companies to buy back shares through the open market, restricting them to the tender offer route. This regulatory change has further limited the flexibility of companies in executing buybacks.

The Road Ahead

The new buyback tax regime represents a significant shift in India's tax policy. While the changes aim to create a more equitable tax environment and discourage misuse of buybacks, they also pose challenges for shareholders and market participants. Investors must now carefully consider the tax implications of participating in buybacks and adjust their portfolio strategies accordingly. Companies, too, need to re-evaluate their capital allocation decisions in light of the changed tax landscape. As the market adapts to these changes, it remains to be seen whether buybacks will regain their popularity or whether alternative methods of returning value to shareholders, such as dividends, will become more prevalent.