Budget impact? 16 firms announce share buyback before new tax rules take effect

Currently, companies pay a 20 percent tax on buybacks, with no additional tax for investors. However, under the new rules, companies won't deduct taxes, and investors' proceeds will be taxed as dividends according to their income tax slab.

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26 Aug, 2025 12:21

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Nearly 16 firms announced plans to buyback shares post July 23, the day  when the government announced, in Union Budget 2024, that new tax rules on repurchases will take effect on October 1.

These firms include Indus Towers, which announced the largest buyback of the lot at Rs 2,640 crore, followed by AIA Engineering at Rs 500 crore and Welspun Living Ltd at Rs 278 crore. Other companies, such as TTK Prestige, Cera Sanitaryware, and Navneet Education among others, announced buybacks ranging from Rs 7 crore to Rs 200 crore.

Experts said investors in buybacks may face higher out-of-pocket taxes as the government plans to change the buyback tax rules. On July 23, while presenting the Budget, finance minister Nirmala Sitharaman proposed taxing income from share buybacks in the hands of the recipient.

Currently, companies pay a 20 percent tax on buybacks, with no additional tax for investors. However, under the new rules, companies won't deduct taxes, and investors' proceeds will be taxed as dividends according to their income tax slab.

Investors can claim the cost of bought-back shares as capital losses, which can be carried forward for eight years to offset future capital gains. However, experts warn this could lead to higher immediate taxes, with capital losses only being useful when future gains are realised.

Tax experts argue that taxing buybacks may be unfair, as the primary purpose is to return excess capital to investors. However, there has been a tax arbitrage between dividends and buybacks, leading companies to prefer buybacks. The government has now closed this loophole.

This is significant as buybacks have become a popular method for companies to reward shareholders, offering them a chance to sell shares at a premium over market prices. According to Prime Database, nearly Rs 1.5 lakh crore worth of buybacks have occurred in the last five years, with 2023 being the second-highest year, totaling Rs 48,452 crore, just behind 2017’s Rs 55,743 crore.

Sneha Poddar from Motilal Oswal Securities notes that the high market levels and the confidence boost from buybacks have driven many recent announcements. However, she expects buybacks to slow down once the new tax rules take effect. The removal of the 20 percent flat tax on buybacks means higher-tax-bracket investors will face greater tax burdens, making buybacks less appealing. Investors may become more selective, particularly if the premium offered does not offset the increased tax costs.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.