Capital Gain on Buy Back of Shares

  • Blog|Income Tax|
  • 2 Min Read
  • By Taxmann
  • |
  • Last Updated on 22 January, 2021

Recent Posts

Blog, News, GST & Customs

Appellate Authority Should Entertain Appeal of Assessee Who Failed to Attend Hearing as His Residence Was Shifted | HC

Blog

Bombay HC Quashed SCN Issued to Levy GST on Ocean Freight on FOB Contracts

Latest from Taxmann

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.
 
 
Also Read:
 

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

Comments are closed.

«
»

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on Taxmann.com

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied