Section 115QA – Tax on Buyback of Shares

What is Buyback of Shares?

In simple terms, buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. The company buys back its shares usually at market value or higher. Companies use buy back as a means to return cash to shareholders and regain ownership. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.

Why do Companies Buyback shares?

As per recent trends, one can observe an increasing use of buy back as means of capital restructuring by Indian companies. The following are certain objectives a company aims to achieve when it undertakes buyback:

  • Share buybacks reduce the number of shareholders of the company, thus enhancing the EPS (Earning per share) to shareholders in the long run. 
  • Management may feel the market has undervalued its share price too sharply, hence a buyback may result in fairer valuation of the company’s stock price.
  • Helps improve key financial ratios like return on net worth, return on assets etc. over a period of time.
  • Serves as a positive sign for investors about the confidence of the management in the business. 
  • Provide exit to investors in times of volatility

Income Tax on Buyback of Shares under Section 115QA

Earlier, the amount distributed as buy-back of shares was chargeable to capital gains in the hands of the shareholders and not charged to the company. As a result, income tax was payable at lower rates on buyback of shares. In order to avoid the tax, companies started resorting to buyback of shares as an attractive way to distribute surplus income amongst stakeholders. As an anti-tax avoidance measure, the government introduced Section 115QA under the Income Tax Act vide the Finance Act, 2013.

Initially, section 115QA was applicable only to unlisted companies. However, the Union Budget 2019 announced the said section to be applicable to the listed companies as well. The amendment is effective for all buybacks post July 5, 2019, vide Finance Act (No.2) 2019.

What does Section 115QA say?

  • Both listed and unlisted companies are liable to pay additional income tax on the amount of distributed income on buyback of shares from shareholders. 
  • The tax on distributed income (i.e. buy-back) is payable by the company even if such company is not liable to pay income tax.
  • The company is liable to pay tax at 20% plus surcharge at 12% plus applicable cess.
  • The company is liable to pay the tax within a period of 14 days from the date of payment to the shareholders on the buyback.
  • The tax on buyback shall be treated as final payment of tax. No further credit shall be claimed either by the company or any other person in respect to the tax so paid.
  • As companies are now liable to pay tax on buyback of shares. Furthermore, shareholders do not have to pay any tax on any income arising from the buyback.

When are the provisions of Section 115QA not applicable?

The provision of Section 115QA is not applicable under all of the situations below:

  • The company is listed on the recognized stock exchange; and
  • The company has announced buyback of its shares; and
  • The public announcement took place before July 5, 2019; and was in accordance with the provisions of the Securities and Exchange Board of India (Buyback of Securities) Regulations, 2018.

Illustration

A company repurchased 100 shares in January 2019 at the market price of INR 50. The issue price for the same is INR 10.

Tax Liability Prior to Amendment Post Amendment
Company No tax liability The company is now liable for a buyback tax of 20% on the distributed income that is Rs. 40, the difference between market price and issue price (50-10).
Individual shareholder Individual shareholders must pay capital gains tax (long term or short term) depending on the holding period of shares on the difference amount (Market price – Issue Price) that is Rs. 50– Rs. 10 = Rs. 40. No tax liability

Implications to individual shareholders

Generally, a company which has distributable surplus has two options to return cash to its shareholders: 

  • Declare dividend
  • Buyback its shares

Earlier, the declared dividend was chargeable as Dividend Distribution Tax (DDT) to the company and not the shareholder. Whereas the amount distributed as buy-back of shares was chargeable to the shareholder and not the company. The rationale for the introduction of Sec 115 QA was that companies would resort to buyback of shares in order to avoid dividend distribution tax. However, under budget 2020, DDT on dividends was abolished and the company is no longer liable to pay tax on dividends. Instead, dividends would be taxable in the hands of the shareholder (as per applicable slab rates). From the shareholder’s perspective, this means that income from buybacks is now more tax efficient compared to income from dividend.

FAQs

I am an employee and my company recently announced an ESOPs buyback, do I have to pay tax on income received through through these ESOPs sales?

No, when it comes to buyback of shares, the provisions under sections 10(34A) and 115QA of the Income Tax Act shall intervene. As per section 10(34A), any income arising to a shareholder (including ESOP-shares) on account of buyback of shares by the company shall be exempt in the hands of such shareholders. Further, as per section 115QA, the tax @ 20% shall be paid by the unlisted company on the buyback of its shares.

Can tax credit be claimed for tax paid on buyback of shares?

The tax on distributed income paid/ payable by the company shall be treated as final payment of tax. No further credit shall be claimed either by the company or any other person in respect of the amount of tax so paid. Further, income charged under section 115QA shall not be allowed any deduction under any other provisions of the Act either to the company or shareholders.

Got Questions? Ask Away!

  1. Hey @TanyaChopra

    There are multiple objectives as to why a company would buy back their shares.

    • It reduces the number of shareholders of the company and enhances the EPS (Earning per share).
    • Helps improve key financial ratios like return on net worth, return on assets etc. over a period of time.
    • To the investors it shows the confidence the management has in the business.

    We have an article specifically about Buyback Shares. You can read more about it here.

  2. Hi @Peri_Ram_Prasad

    Provisions of section 115QA were initially applicable only to unlisted companies. However, vide the Finance (No. 2) Act, 2019, the provisions of section 115QA are amended and the same is made applicable to the listed companies also.

    However, it excludes listed companies whose public announcement has been made before 5th July 2019 and was as per the provisions of SEBI Regulations. Attaching the screenshot of the Section from the Income Tax Act .

  3. Hey @long123bridge ,

    If any company buys back shares from capital, it will affect shareholding patterns of company with revised stakes. Share value may increase at time of buy back and if any shares sold or transferred by shareholders will trigger tax implications in hands of company and not investors.

    You can read below article of capital gain taxation for more insights:

    Hope, it helps!

  4. Hey @Vikas

    Generally, ESOPs of unlisted companies are liable for tax at the time of allotment of shares (under salary head - perquisites) and at the time of sale of shares (capital gain head).

    If ESOPs of unlisted company are sold within 24 months then holding period will be treated as short term and if sold beyond 24 months then it will be treated as long term respectively.

    Here, in your case when company is acquired by another company and owing to which shares are got cancelled then the said transaction should not be treated as buy back and hence, taxability would not fall under the purview of 115QA of income tax act.

    Any amount or consideration received should be treated as capital gain income and you can report under capital gain head in ITR.

    Hope, it helps!

  5. Hi @Kaushal_Soni My company’s investor recently aqquired ESOP from employees. Excercise and sell happened on the same day. Company deducted 30% TDS on the entire gain amount. Form16 also shows the full gain amount as Prerequisite tax under Salary Head.

    While filing ITR-2, can I reduce prerequisite tax based on (FMV - excercise price) formula and remain (Sell price - FMV) as capital gain?

    Also, I have some carry forwarded short term loss from listed shares. Can I adjust this STCG (of Esop) with the loss? Please help

  6. Hi @Shubhabrata_Naha

    Yes, you can bifurcate your ESOP gain and salary part by applying formula as per income tax act.

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