Important Income Tax Alert: Major Amendment in Buy-Back Taxation:

Important Income Tax Alert: Major Amendment in Buy-Back Taxation The Ministry of Finance has introduced a few significant changes in buy-back taxation announced in the Finance Act (No. 2), 2024, which is effective from October 1, 2024. Here is a detailed explanation:

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New Rule w.e.f. 01.10.2024-Section 115QA Omitted

Earlier, when a company bought back its shares from shareholders, the company had to pay a special tax of 20% on the buy-back amount under Section 115QA of the Income Tax Act. Shareholders did not pay tax on such income because the tax was already paid by the company. This was a company-level tax. Section 115QA has been removed as of October 1, 2024. Meaning, the company is no longer required to pay a buy-back tax of 20%. Instead, the tax responsibility has now been shifted to the stakeholders who receive the money from the buyback of shares.

Shareholder Now Pays Tax as "Deemed Dividend"-Section 2(22)(f)

The entire buy-back amount received by the stakeholders will now be considered as a "deemed dividend" under Section 2(22)(f) of the Income Tax Act under the new system. Meaning, the complete buy-back amount, not just the profit portion, will be considered income in the hands of stakeholders. It will be taxed under the head “Income from Other Sources.” No deductions are permitted against this income under Section 57; hence, you are not allowed to reduce this income by claiming any expenses such as brokerage, legal fees, etc.

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Capital Gains Treatment-Section 46A Amended

Earlier, the buyback of shares could result in capital gains or capital losses, depending on the difference between the buyback price and the cost of acquisition. However, now under the newly introduced amendment in Section 46A, the buy-back consideration will be considered as NIL for calculating capital gains.

• Meaning, Capital Gains = NIL (deemed consideration) - Cost of Acquisition

Therefore, shareholders will display a capital loss equal to the cost of shares sold under the buyback. You can use this capital loss to reduce your capital gains in the same year or in future years, as per regular capital gains rules. This can help in saving tax. But remember, this loss is separate from the dividend income we talked about earlier-both must be reported separately.

TDS (Tax Deducted at Source) Provisions

Now that the shareholder is taxed:

• TDS at 10% will be deducted from the buy-back amount for resident shareholders under Section 194.
• For non-residents, TDS will apply as per Section 195, and they may claim relief under the DTAA (Double Taxation Avoidance Agreement) if available.

Be Careful While Reporting ITR

This amendment will impact the Income Tax Return (ITR) filing for the financial year 2024-25 (assessment year 2025-26). Shareholders (especially investors and promoters) must:

• Report the dividend income under “Schedule OS” (Income from Other Sources).
• Report the capital loss (due to NIL consideration) under “Schedule CG” (Capital Gains).
• Avoid double reporting or incorrect tax treatment.
• Keep a record of the TDS certificates and correct classification for a smooth refund or credit.

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This change is major, especially for promoters, startup founders, and high-net-worth individuals who often engage in buy-back transactions. Tax professionals need to carefully adjust their reporting strategies and ensure proper ITR disclosures to avoid mismatches, tax notices, or excess tax outflows.