Capital Gain on Buy Back of Shares

  • Blog|Income Tax|
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  • By Taxmann
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  • Last Updated on 22 January, 2021
A company can decide to buy back its shares from a shareholder in the market because of several reasons like the company considers that the market price of shares is lower than their worth etc. 
 
When a company decides to buy back its own shares from a shareholder, it is considered as ‘transfer’ and the income i.e., the difference between the cost of acquisition of shares and the purchase price paid by the company, will be considered as capital gain and is charged taxes accordingly.
 
In case shares are unlisted then the capital gain becomes exempted from any sort of taxes as per provisions under Section 10(34A) in the hands of the shareholders. But the company who is buying those shares tends to be liable to pay taxes at the rate of 20% on the said distributed income from that purchase.
 
Capital Gains Tax
 
However in case of shares which are listed on the recognised stock exchange, when a company offers to buy back its own shares from the shareholder or even some other securities, then the difference between cost of acquisition of those shares and the value of consideration to be received by the holder of those securities, is considered to be the capital gain in the hands of the shareholder for the year in which those shares are transferred to the company.
 

Particulars

Amount

Sales Consideration

Less:

a) Expenditure in connection with transfer

b) Cost of Acquisition/Indexed Cost of Acquisition

xxx

 

(xxx)

(xxx)

Short-term/Long-term Capital Gains

xxx

 

For the purpose of computing the amount of capital gain:
 
1. Sales consideration means the amount which is received or receivable by the shareholder due to buy back of those shares. 
 
2. Cost of acquisition shall be computed as per the provisions contained in section 48 of the Income-tax Act, 1961. Therefore an assessee can claim the benefit of the indexation as specified under section 48. However, if shareholder is a non-resident who buys the shares in foreign currency, then his cost of acquisition shall be calculated in accordance with the provisions contained in Rule 115A read with section 48.
 
3. The period of holding the shares is calculated form the day when they were purchased or acquired until the date on which they were bought back by the company. The gain arising from the buyback shall be chargeable to tax in the year in which the company purchases the shares.
 
 
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