Tax rules for non-residents on Indian share buybacks: What you need to know

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Share buybacks have been a popular device for Indian firms to distribute capital to shareholders. For foreign investors like NRIs, foreign nationals, and overseas institutions, buybacks raise an important question: will they be taxed on money they receive from an Indian firm buying back its own shares? The answer is in whether the firm is listed or unlisted, and the manner of buyback.

Taxation of buybacks by unlisted companies

In the case of Indian unlisted companies, the taxation is simple. As per Section 115QA of the Income Tax Act, 1961, any Indian company that buys back its shares in the open market is subject to paying a 20% tax (surcharge and cess included) on the difference between the purchase consideration and face value of the shares. The company itself pays the tax and not the shareholder.

This means that non-resident shareholders who receive funds from a buyback are not liable to pay any tax on it in India. The income is exempt in their hands completely under Section 10(34A) of the Act. This section is applicable for both resident and non-resident shareholders.

Therefore, if an unlisted company makes an off-market buyback offer and a non-resident accepts the same, the company gets burdened with the tax incidence and the non-resident can be remitted the proceeds without incurring any further tax incidence in India.

Tax norms for buybacks of listed companies

The position changes when an Indian listed company does a buyback through the exchange. In this case, the shareholder in this case treats the buyback as any common sale of a share. Special buyback tax under Section 115QA is not applicable here. The shareholder in this case pays capital gains tax.

In the case of non-resident shareholders, capital gains tax on listed shares is different depending on the holding period of the shares. If the shares are held for more than 12 months, the gains are long-term and are taxed at 10% (with applicable surcharge and cess) under Section 112A, provided the gains are more than ₹1 lakh during a financial year. If the shares are sold within 12 months, short-term capital gains tax of 15% is charged under Section 111A.

In addition, non-resident investors may also be entitled to relief under Double Taxation Avoidance Agreements (DTAAs) signed by India with other countries. For instance, some treaties allow capital gains to be taxed only in the investor's country of residence, exempting or restricting Indian tax. However, such relief is granted only if the investor meets the specific conditions laid down in the relevant treaty.

For foreign investors, the tax impact of a share buyback by an Indian company will depend on whether the buyback is off-market or through the stock exchange. For off-market buybacks, especially from unlisted companies, there is typically no tax to the shareholder. But for listed companies buying shares back through the exchange, there is capital gains tax.

To avoid unplanned tax costs and to take advantage of treaty benefits if any, non-resident investors should consult a tax professional or a financial advisor before investing in a buyback offer. Knowing the rules can help you protect your return on investment as well as avoid any compliance issues in the future.