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Buy-Back of Shares Taxation Post-October 2024: Key Changes Under Finance Act 2024
Understand the implications of Section 2(22)(f) and the repeal of Section 115QA on your tax filings.
Introduction
The Finance (No. 2) Act, 2024 has significantly altered the tax landscape for shareholders participating in domestic company buy-backs, effective from 1 October 2024. This article reviews the erstwhile regime, the new “deemed dividend” framework under Section 2(22)(f), the repeal of company-level buy-back tax under Section 115QA, and the practical impact on shareholders’ income tax returns for AY 2025–26 and beyond.
These changes directly affect how shareholders must report and pay taxes on buy-back proceeds. Taxpayers are strongly advised to consult professionals to ensure correct disclosures and avoid potential notices or penalties.
Background: Buy-Back Taxation Until 30 September 2024
- Company’s Obligation: Domestic companies distributing buy-back consideration were liable to pay tax under Section 115QA at 20% (plus surcharge and cess) on the “income” deemed to arise from the buy-back of its own shares.
- Shareholder Treatment: Amounts received by shareholders were exempt under Section 10(34A). Consequently, shareholders had no additional tax liability, nor any capital-gain consequences.
Finance (No. 2) Act, 2024: New Deemed Dividend Regime and Section 115QA Proviso
With effect from 1 October 2024, the Act introduces the following key changes:
1. Shareholder Taxation
- The entire consideration received on buy-back of shares by a domestic company is deemed to be a dividend in the hands of the shareholder under Section 2(22)(f).
- Shareholders must include this amount as “Income from Other Sources” in Schedule OS of the applicable ITR.
2. Capital-Gains Computation
For capital-gains purposes, the “consideration” is deemed to be nil as per proviso to section 46A, resulting in a notional capital loss equal to the buy-back proceeds. This notional loss can be reported in Schedule CG, may be set off against other capital gains (subject to Sections 70 and 74), and any unabsorbed loss may be carried forward for up to eight subsequent assessment years. However, it cannot be set off against income under other heads, including the deemed-dividend taxed in Schedule OS.
3. Company-Level Buy-Back Tax (Section 115QA)
- A new proviso has been inserted into Section 115QA (1):
“Provided further that the provisions of this sub-section shall not apply in respect of any buy-back of shares that takes place on or after the 1st day of October, 2024.”
4. Effect:
Companies pay buy-back tax under Section 115QA only for buy-backs occurring on or before 30 September 2024. For buy-backs from 1 October 2024 onwards, Section 115QA does not apply, and the company has no further buy-back tax liability.
5. Key Takeaways for Taxpayers
- Increased Tax Burden: Shareholders bear tax at their slab rate on the entire buy-back amount
- TDS: The domestic company buy-back its own shares will be required to deduct tax at source (“TDS”) at the rate of 10% u/s 194 in case of resident shareholders; and in case of non-resident shareholders, at the rates in force or as per DTAA u/s 195.
- No Double Benefit: The notional capital loss cannot be set off against the deemed-dividend (taxed under Income from Other Sources), but may be set off against other capital gains and carried forward for eight assessment years.
- Accurate Disclosures: Ensure correct reporting in Schedule OS and Schedule CG to avoid notices.
- Company-Level Relief: Companies pay buy-back tax only on pre-1 October 2024 transactions; no company-level tax for later buy-backs.
6. Conclusion
The introduction of the deemed dividend framework and the repeal of Section 115QA for buy-backs on or after 1 October 2024 mark a significant shift. Shareholders must carefully assess the tax impact and ensure precise reporting in their ITRs for AY 2025-26 and beyond. Professional guidance is recommended to navigate the revised compliance landscape and optimize distribution strategies.
For expert assistance with buy-back taxation, ITR preparation, or broader tax advisory services, please contact: Balakrishna & Co. Chartered Accountants +91 86182 59712 | This email address is being protected from spambots. You need JavaScript enabled to view it.