Capital Gains on Buy-Back of Shares
Introduction:
Buy-back of shares is treated as a transfer, and income from it is taxable under “Capital Gains.”
- From 01-10-2024, consideration received by shareholders from a domestic company’s buy-back is deemed a dividendunder Section 2(22)(f).
- The consideration for capital gains computation is treated as nil, resulting in a capital loss for the shareholder.
Taxation Scope:
- For domestic companies:
- Before 01-10-2024: Exempt for shareholders; company paid tax under Section 115QA.
- From 01-10-2024: Taxed as deemed dividend under Section 2(22)(f).
- For foreign companies: Taxed under Section 46A as capital gains.
- For securities other than shares: Taxed as capital gains under Section 46A.
Computation of Capital Gains:
The computation depends on whether the buy-back is subject to Section 2(22)(f):
- If Section 2(22)(f) applies:
- Full value of consideration is treated as nil, leading to a capital loss.
- If Section 2(22)(f) does not apply:
- Capital gain = Full value of consideration – (Cost of acquisition + Cost of improvement + Transfer expenses).
Key Factors for Capital Gains Computation:
- Period of Holding: Determined from purchase date to buy-back date (FIFO method for Demat holdings).
- Full Value of Consideration: Amount received; deemed to be nilif consideration is taxable under Section 2(22)(f).
- Cost of Acquisition: General provisions apply.
- Cost of Improvement: As per general provisions.
- Exemptions (Sections 54 to 54GB): Available subject to conditions.
Year of Taxability:
Tax liability arises in the year the company executes the buy-back.