The Finance Act, 2024, has fundamentally altered the economics of capital repatriation in India. Effective October 1, 2024, the tax burden on share buybacks has shifted from the corporation to the shareholder, eliminating a long-standing tax arbitrage.

The New “Deemed Dividend” Regime

For years, companies preferred buybacks over dividends because the company paid a flat tax under Section 115QA of the Income-tax Act, 1961 (ITA), while proceeds were exempt for the shareholder. Under the new regime:

• Tax Characterization: Buyback proceeds are now treated as “Deemed Dividend” under Section 2(22)(f) of ITA.
• Shareholder Tax: Income is taxed at the shareholder’s applicable slab rates. For resident HNIs, this can reach 35.88%, a significant jump from the previous effective company-level tax of 22.88%.
• Company Obligation: Companies are no longer liable for buyback tax but must now comply with TDS requirements (typically 10% for residents).

The Capital Loss Disconnection

A critical complexity for investors is the treatment of the acquisition cost. The original cost of the shares is now recorded as a Capital Loss (Long-Term or Short-Term).

• The Trap: This loss cannot be offset against the dividend income from the buyback itself.
• Utility: It can only offset other Capital Gains and can be carried forward for 8 years. If an investor has no offsetting gains, this creates a “tax disjunction” where they pay tax on the full proceeds today for a potential tax benefit in the future.

Globeview Perspective: The New Math

For many high-bracket investors, selling shares on the open market (taxed as LTCG at 12.5% or STCG at 20%) is now mathematically more efficient than participating in a buyback taxed at slab rates.

M&A strategies must now move beyond corporate-level efficiency and focus on the net-of-tax cash flow to the ultimate stakeholders.

Contact us for a detailed assessment of how these changes impact your specific portfolio or corporate restructuring plans.