New Share Buyback Tax Rules Explained: How Will Shareholders Be Taxed? | Math Decoded

Summary

The video explains the changes to India's share buyback tax regime effective from October 1, 2024. Previously, companies paid a 20% tax on buybacks, but the new rules shift the tax burden to shareholders, who will be taxed on buyback proceeds as dividend income. This change may increase the tax burden on small investors. The video provides examples illustrating the impact on resident and non-resident shareholders, highlighting the potential winners and losers under the new rules. The discussion emphasizes the implications for retail investors and corporate capital return strategies.

Takeaways

• 💼 The Indian budget for 2024 introduces tax tweaks that impact share buybacks, effective from October 1, 2024.
• 🏢 A share buyback is when a company buys its own shares from the market, reducing the number of outstanding shares and increasing the value of remaining shares.
• 📊 Companies buy back shares for various reasons like returning profits to investors, improving financial ratios, and consolidating voting rights.
• 💰 From October 2024, the tax burden for share buybacks will shift from companies to shareholders, with the company no longer paying a 20% tax on buybacks.
• 🧾 Shareholders will be taxed on buyback proceeds as dividend income, with tax deducted at source (TDS) at 10% for residents and 20% for non-resident Indians (NRIs).
• 💸 The cost of shares bought back can be claimed as a capital loss and offset with other capital gains.
• 📉 This new rule increases the tax burden on small retail investors, as shareholders will now pay tax on the buyback amount they receive.
• 📈 Under the new system, for example, a shareholder in the 30% tax bracket would pay a significant portion of the buyback proceeds in taxes.
• 💡 Small investors are at a disadvantage under this system, paying a higher percentage of their profits in taxes compared to wealthier investors.
• 📊 Experts suggest that it would be more beneficial if the tax on share buybacks was treated as long-term capital gains (LTCG) rather than dividend income, especially for small investors.

Q & A

What is a share buyback?

A share buyback occurs when a company purchases its own shares from the market, which reduces the number of outstanding shares and increases the value of the remaining shares. Companies do this for various reasons, such as returning profits to investors and improving financial ratios.

Why are companies rushing to announce share buybacks before October 1, 2024?

Companies are rushing to announce share buybacks before October 1, 2024, because new tax rules will shift the tax burden from companies to shareholders, making buybacks less favorable for shareholders, especially small retail investors.

What are the key changes in the share buyback tax rules starting October 1, 2024?

Key changes include the elimination of the current 20% buyback tax paid by companies. Instead, shareholders will be taxed on buyback proceeds as dividend income based on their applicable tax slabs. Companies will also deduct TDS at a rate of 10% for residents and 20% for non-resident individuals.

How does the new share buyback rule impact shareholders compared to the old system?

Under the old system, companies paid the 20% tax on buybacks, and the amount shareholders received was tax-free. Under the new system, the buyback amount is treated as dividend income and taxed in the hands of shareholders, increasing their tax burden.

What is the capital loss provision under the new rules for share buybacks?

Under the new rules, the cost of shares bought back by the company can be claimed as a capital loss by shareholders, which can then be offset against capital gains from other share sales.

Why is the new rule considered less favorable for small retail investors?

The new rule increases the tax burden on smaller retail investors by taxing buyback proceeds as dividend income, which can result in higher taxes compared to the previous system where companies paid the buyback tax.

How does the new buyback tax rule impact non-resident shareholders?

Non-resident shareholders will have a 20% TDS deducted from their buyback proceeds. They may benefit from tax treaties, which can reduce their overall tax burden compared to resident shareholders.

Why do experts suggest that the new buyback tax should be treated as long-term capital gains (LTCG)?

Experts suggest that taxing the buyback as long-term capital gains (LTCG) would be more beneficial for small retail investors, as LTCG rates are generally lower compared to dividend income tax rates.

Who are the likely winners and losers under the new share buyback tax regime?

Winners include tax authorities, who will collect more revenue, tax-exempt mutual funds that may gain popularity, and non-resident shareholders with tax treaties. Losers include high-income resident shareholders and companies that can no longer use buybacks as a primary capital return method.

What is the impact on high-income shareholders under the new buyback tax regime?

High-income shareholders will face a higher tax burden on buyback proceeds, as these will be taxed as dividend income. For shareholders in higher tax brackets, this results in a significantly increased tax liability compared to the previous system.