In India, stock buybacks are subject to tax treatment based on the nature of the buyback. For individual investors, the proceeds from a buyback are treated as capital gains. If the shares are bought back within a year of purchase, it is classified as short-term capital gains (STCG) and taxed at 15%. If the shares are bought back after holding them for more than a year, it is considered long-term capital gains (LTCG), which is taxed at 10% if the gains exceed ₹1 lakh in a financial year. However, the buyback itself is also subject to a buyback tax at 20% at the company level, which is deducted at source.

What is Stock Buyback?

A stock buyback occurs when a company repurchases its own shares from the open market or from existing shareholders. This is often done to return excess cash to shareholders, reduce the number of outstanding shares, or increase the value of remaining shares. Companies may also buy back stocks to improve earnings per share (EPS) ratios or provide market liquidity.

How Are Stock Buybacks Taxed in India?

For individual investors, the tax treatment of stock buybacks depends on the holding period of the shares. When the company repurchases shares from investors, the difference between the sale price and the purchase price is taxed as capital gains. If the shares have been held for less than a year, the gains are taxed as short-term capital gains (STCG). If the holding period exceeds one year, the gains are classified as long-term capital gains (LTCG), subject to specific tax rates.

Short-Term Capital Gains (STCG) on Stock Buybacks

If the stock is bought back within one year of its purchase, the gains are considered short-term capital gains (STCG). These are taxed at a rate of 15%. The calculation of STCG includes the difference between the price at which you sold the stock back to the company and the price at which you initially bought it.

Long-Term Capital Gains (LTCG) on Stock Buybacks

If the stock is bought back after being held for more than one year, the gains are classified as long-term capital gains (LTCG). These gains are subject to a 10% tax, but only if the total LTCG in a financial year exceeds ₹1 lakh. If the total LTCG is less than ₹1 lakh, the gains are tax-free. This applies to both individual and institutional investors.

Buyback Tax at Company Level

In addition to capital gains taxes, companies are also required to pay a buyback tax at the rate of 20% on the buyback amount. This tax is applicable to the company, not the individual investor, and is deducted at source when the buyback takes place. However, this tax is not directly paid by the individual investor, but it does affect the overall tax implications of the buyback process.

How to Calculate Capital Gains on Stock Buybacks?

To calculate the capital gains on stock buybacks, subtract the price at which you bought the stock from the price at which the stock is bought back by the company. This gives you the capital gain. Depending on the holding period, the gain will be taxed either as short-term capital gains (STCG) or long-term capital gains (LTCG).

What Is the Impact of Buyback Tax on Shareholders?

The buyback tax at the company level can impact shareholders indirectly. While shareholders do not pay the company’s buyback tax, the amount could reduce the overall funds available for the buyback, potentially affecting the price at which the shares are bought back. Additionally, capital gains tax applies based on the holding period of shares, as previously mentioned.

How to File Taxes on Stock Buybacks?

When filing taxes on stock buybacks, you need to report the capital gains earned from the buyback. This is done by reporting the sale proceeds and deducting the original purchase cost. Short-term and long-term capital gains should be reported separately based on the holding period. You must also include any buyback tax withheld by the company at the source, as part of your total income.