Tax on Buyback Policy of Budget 2024
In this year’s budget, it was announced that buybacks will now be taxed in the “hands of the investor”.
When a company buys back its shares from investors, it is called a ‘buyback’.
Example: you have 100 shares of a company.
That company says that it will buy a total of 1000 shares from the markets.
The company will open a buyback offer under which you can sell your shares.
Buybacks usually happen at a price higher than the market price.
Hence, many investors might prefer selling their shares during that time.
Buybacks happen in 2 ways:
-Tender offer (option to sell shares within a specific time window)
-Open market route (companies buy shares over an extended period of time).
In the case of a tender offer, when you sell your shares under that buyback, you are making a gain, and you had to pay no tax on it earlier.
Instead, the company had to pay 20% tax on the buyback.
Now, with the latest change applicable from 1 October 2024, investors participating in buyback offers will have to pay tax on the gains as per their income tax slab.
The finance minister also mentioned that the cost of acquisition of shares will now be considered “capital losses.”
This means that in the upcoming years, when you have to pay a tax on any capital gains (stocks, mutual funds, etc.), you can deduct the ‘capital loss’ that you incurred during the buyback and pay less tax.