Market cheers Infosys buyback, but tax bite looms for investors

Infosys' mega ₹18,000-crore share buyback has lifted spirits on Dalal Street, but beneath the euphoria lies a crucial question: how much will investors pay as per the new tax rules. The matter has drawn attention as this is the first large buyback since the revised regime took in October, 2024.

What is a buyback of shares and why do companies do it?

A buyback is when a company purchases its own shares from existing shareholders, thereby reducing the total number of shares in the market. Companies may do this for several reasons: they may feel their shares are undervalued and want to support the price, to improve earnings per share by lowering the share count, to prevent hostile takeovers, or to deploy surplus cash effectively.

What are the kinds of buybacks in India?
Buybacks are usually carried out via two routes: a tender offer, and an open market purchase. In a tender offer, the company offers to repurchase its shares from shareholders at a fixed price (usually at a premium to the market price) within a specified time frame. If the total number of shares tendered exceeds the buyback size, the company accepts them on a proportionate basis.

In an open-market buyback, companies buy back shares from the secondary market for a certain pre-determined period.

Which route has Infosys opted?
Infosys' buyback will be by a tender offer. It will accept tenders at ₹1,800 per share, against Friday's close of ₹1,525.6, implying a premium of 18% on these shares. The record date for the buyback has not been announced yet.

What are the tax implications for individual shareholders?

Earlier, the tax burden of buybacks lay on the companies. But since October 24, the tax liability has shifted to individual shareholders. "Now, for any amount paid on the buyback, the entire amount is considered as a dividend in the hands of the individual shareholder, " said Hitesh Sawhney, Partner, Price Waterhouse & Co. LLP. He said the buyback proceeds are taxed as part of the individual's income, according to her income-tax slab rates.

So, how does it work?
Let's assume a company announced a buyback at ₹10,000 per share. Now, an individual investor bought the shares at ₹6,000 per share and tendered in the buyback process. As per the new rules, the entire ₹10,000 is treated as dividend income for the investor. This means the company will levy 10% TDS or Tax Deducted at Source (₹1,000) and pay the investor ₹9,000.

Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm, said while the 10% TDS is for resident shareholders, 20% TDS or the applicable treaty rates applies for for non-residents.

Now, there is one more layer of taxation here as the investor must pay a tax on the entire ₹10,000 as per her income tax slab, after adjusting for the TDS amount. So, if the investor has annual income between ₹12 lakh and ₹lakh (under the new tax regime), she would fall in the 15% income tax slab. Here, she must pay an additional 5% tax (₹500 on ₹10,000) on this amount which is classified as "other income." This excludes any cess. This applies to shareholders in both listed and unlisted companies.

Before October 2024, companies were liable to pay a 20% buyback distribution tax (plus surcharge and cess) on the difference between the buyback price and the issue price of shares.

Is there any relief for investors tendering shares in the buyback?
Yes. The initial investment of ₹6,000 will be recorded as a capital loss, which can be set off against capital gains. Vivek Gupta, Partner, Deloitte India, said the cost of acquisition recorded as a capital loss in a buyback can be set off against gains in the same year or carried forward for up to eight years.

What is the market feedback to the new buyback tax regime?
Many market participants and consultants said the new system is onerous for large and high-income shareholders. The new regime is however, more beneficial for small shareholders in lower tax slabs. Active investors may benefit from the ability to set off capital losses, but taxing the entire buyback proceeds - including capital - is viewed as unfavourable for those in higher slabs.