Analyzing Corporate Buybacks and Their Tax Implications Under the Income Tax Act of 1961


In the realm of corporate finance, the buyback of shares, also referred to as a share repurchase, is a strategic manoeuvre where a company reacquires its own stock from the marketplace or its existing shareholders. This action effectively reduces the number of outstanding shares, often signalling confidence in the company’s prospects and aiming to enhance shareholder value.

The Income Tax Act of 1961 delineates specific provisions concerning the taxability of buyback transactions. In this discussion, we will delve into the intricacies of share buybacks, exploring the rationale behind such corporate decisions, the pertinent income tax provisions, and the meticulous calculation of distributed income. Furthermore, we will examine the tax implications for both shareholders and the company.

Understanding these dynamics is crucial for stakeholders to navigate the financial and regulatory landscapes effectively. By comprehending the motivations and regulatory nuances of share repurchases, investors and corporate leaders can better strategize to optimize financial outcomes and adhere to statutory requirements.

Meaning of Buyback

Buyback of shares refers to repurchasing shares of the company that issued them. The company pays the shareholders the market value of the shares and reclaims the ownership that was previously distributed. This action decreases the total number of shares in circulation, thereby increasing the value of the remaining shares.

Reasons for Buyback of Shares

A company buyback its own shares for the following reasons:

  1. Excess Cash Distribution: Companies with excess cash reserves choose to buy back shares to return capital to shareholders. This option is used when a company views its shares as undervalued or wishes to distribute cash without committing to dividend payments.
  2. Compact Ownership: Major shareholding implies widespread ownership, which leads to higher company costs. Thus, to bring compactness in ownership and reduce the cost of capital, the company buys back shares.
  3. Attractive Financials: A share buyback can make a company’s financials look attractive. With fewer shares, the company’s Earnings per Share look attractive.
  4. Tax Efficiency: A share buyback offers tax advantages over dividends. When dividends are taxed as income in hands of shareholders, buybacks can lead to capital gains which will be taxed at a lower rate or is deferred until the shares are sold. This provides a more tax-efficient method of returning capital to shareholders.

Key Terms

Let us first understand a few key terms before proceeding towards the share buyback taxability.

Listed Company—It is a Public Limited Company whose shares are listed and traded on a stock exchange, where transactions take place in the open market.

Unlisted Company- It is a Private Company whose shares are not listed on a stock exchange. The exchange of shares takes place over the counter markets and as per the agreement made between the parties.

Process of Buyback

Listed Company

The buyback for listed companies is carried out in 2 ways:

1) Tender Offer: A public offer made by a company to its shareholders to purchase a portion of their shares at a specified price and within a specified period. This allows shareholders to tender or sell their shares back to the company.

2) Open-Market Offer: The company repurchases its shares directly from the stock market. The company buys its shares gradually over time at prevailing market prices.

Unlisted Company

Since the shares are not listed on a stock exchange, the only way to buy back such shares is to place an offer in front of the existing shareholders and repurchase from them.

Income Tax Provision for Buyback of Shares

The provisions of income tax with respect to the buyback of shares are covered u/s 115QA.         As per this section, any domestic company that buys back its own shares is liable to pay additional income tax on the distributed income. The tax rate for the distributed income is 23.296%, including the base rate of 20% plus surcharge @12% and Health and Education Cess @4%. This tax is known as ‘buyback tax’ or ‘buyback distribution tax’.

Calculation of Distributed Income

In the case of both Listed and Unlisted Companies, the tax is levied on buyback or distributed income.

Distributed Income = Consideration paid by the Company on account of buyback – the amount which was received by the company for the issue of such shares.

If the buyback is through the open market, the shares goes past through various hands. The company cannot identify the purchase price at which individual investors would have bought shares from the open market. In such cases, the tax is levied in the hands of the company on the difference between the buyback price and the price at which the company issued its shares irrespective of the market price at which the buyer would have bought it.

Tax Implications for Shareholders

The income earned by shareholders in case of buyback of shares is exempt from tax as per Section 10(34A) under the Income Tax Act. Since income is exempt, shareholders must consider the implications under section 14A. Further, the treaty has no role to play on account of the exemption to shareholders.


Let us understand with the help of an illustration:

XYZ Limited is a manufacturing company that announced a buyback of 500 shares with a market price of Rs.1000. The shares were issued by the company a few years back at Rs.100.

Here, the tax is levied in the hands of the company as follows:

Distributed Income= (500 shares x Rs.1000 per share)- (500 shares x Rs.100 per share) = Rs.4,50,000

Tax amount on buyback shares= (23.296% x 4,50,000) = Rs.1,04,832

However, the shareholder is exempt from paying tax.

Due Date for Payment of Buyback Tax

This tax shall be payable within 14 days from the payment date of any amount to the shareholders on the buy-back of shares as per section 115QA (3).

In case the tax is not paid within the due date, the company shall be liable to pay simple interest at the rate of 1% per month or part thereof on the amount of tax for the period beginning from the last date on which such tax should have been paid as per Section 115QB.