Stock market news: This income tax rule to be implemented next month | Mint

Stock market news: This income tax rule to be implemented next month | Mint

Source: Live Mint

Starting October 1, 2024, significant changes will be implemented in the taxation of share buybacks, shifting the tax burden from companies to shareholders. Companies are taxed at 23.296 per cent on buyback transactions, covering surcharges and cess, while shareholders face no tax on the buyback proceeds. Under the new rules, buyback proceeds will be treated as dividends and taxed according to shareholders’ income tax slabs. Companies must deduct tax at source (TDS) at 10 per cent for resident individuals and 20 per cent for non-resident individuals.

“Starting October 1, the new share buyback rules will transfer the tax burden from companies to shareholders. Instead of the current 23.296 per cent tax on buyback proceeds paid by companies, shareholders will be taxed according to their individual income tax slabs. Companies will need to withhold tax at source (TDS) at a rate of 10 per cent for resident individuals and 20 per cent for non-residents,” Abhishek Soni, CEO and Co-founder of Tax2win, explained.

Siddharth Maurya, Founder and Managing Director of Vibhavangal Anukulakara Private Limited, noted that buyback proceeds will be treated as dividends and taxed accordingly under these new rules. This shift in tax liability from companies to shareholders will fundamentally change how buybacks are taxed. While companies previously enjoyed tax-free buybacks, shareholders now face tax based on their income brackets. This could make buybacks less attractive and potentially increase the preference for dividend distributions or other methods of capital return.”

What the present rule says

“Under Section 10(34A), the shareholder’s money received from a share buyback is exempt. However, the company faces a tax of 20 per cent plus a 12 per cent surcharge and 4 per cent cess on the buyback amount, adjusted for any premiums received. This results in an effective tax rate of 23.296 per cent,” explained Mumbai-based tax and investment expert Balwant Jain.

“Currently, companies are taxed at a rate of 23.296 per cent on buybacks, which includes surcharge and cess, while shareholders face no tax obligation on the buyback proceeds. This setup makes buybacks tax-efficient in returning capital to investors,” Abhishek Soni said.

“The new legislation offers some benefits for specific groups. For example, non-resident shareholders could see reduced dividend tax rates due to double taxation treaties, which could encourage more market participation. Additionally, funds investing in shares may benefit from a smaller tax gap between dividends and buybacks. However, for high-net-worth individuals and resident shareholders in higher tax brackets, buyback schemes may become less appealing due to increased tax liabilities. These changes will require companies and investors to reevaluate their strategies,” Siddharth Maurya, Founder and Managing Director of Vibhavangal Anukulakara Private Limited, said.

In the 2024 Budget, Finance Minister Nirmala Sitharaman proposed a significant change: eliminating the tax on companies for share buybacks. Instead, the buyback proceeds would be classified as dividends and taxed according to the individual shareholder’s income tax slab.

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Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.



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