New Share Buyback Rule from April 1: With new tax rules set to take effect from April 1, changes related to the taxation of share buybacks, dividend income, and mutual fund income are coming into focus. Explaining the development, Tax expert Sunil Garg, highlighted how the government’s approach has evolved and where concerns remain.
Garg said that the rules around share buybacks have been revised multiple times since 2017. He recalled that earlier, companies undertaking buybacks were required to pay around 20 per cent tax, after which the income was largely exempt in the hands of shareholders.
He further explained that under a previous revision, if a company bought back shares at a higher price than the purchase cost, the entire buyback amount could be treated as income in the hands of the investor, while the purchase cost was considered a capital loss.
Garg noted that earlier, companies preferred buybacks over dividends due to a tax difference. “If a company paid dividends, the tax could go up to around 30 per cent plus surcharge and cess, nearly 39 per cent. But through buybacks, the tax was about 20 per cent, so effectively a significant portion of tax was being saved,” he explained.
New Share Buyback Rules: Promoters vs Shareholders classification
According to him, the government’s view was that buybacks were being used in place of dividends, leading to lower tax collection. Under the new rules, this has been addressed by introducing two categories of shareholders—promoters and non-promoter shareholders.
Promoters, defined as those holding 10 per cent or more stake, may now face a tax of up to 30 per cent on buyback gains. Garg also noted that where the promoter is a company, a tax rate of around 22 per cent may apply. Non-promoter shareholders are subject to long-term capital gains (LTCG) tax at 12.5 per cent.
‘Additional Tax’ clause raises complexity concerns
Garg also pointed out that a new “additional tax” component has been introduced. Garg said that while a portion of the tax is treated as capital gains, the remaining portion is classified separately and may not be eligible for adjustment against capital losses.
Garg noted that this limits the ability of taxpayers to offset gains with losses, effectively increasing the tax burden. He added that the revised framework makes the taxation of buybacks more complex, particularly for individual investors, including salaried participants.
Dividend Income: Interest deduction benefit removed
On dividend taxation, Garg said that earlier, investors who borrowed funds to invest in shares were allowed a deduction. “There was a provision where up to 20 per cent of the dividend income could be claimed as an interest deduction. For example, if you earned Rs 2 lakh as dividend, you could claim Rs 40,000 as deduction,” he explained.
Garg added that this provision has now been removed. However, he noted an important distinction: “If your activity qualifies as business income, then full interest deduction may still be available. But under ‘income from other sources’, this 20 per cent deduction benefit has been withdrawn.”
Garg described the broader approach as a mixed one, indicating that while some steps move forward, others step back, particularly for investors relying on such deductions.
As the new rules come into force from April 1, both companies and investors may need to take a closer look at how buybacks and dividend income will be taxed going forward.
