Understanding Recent Developments in Share Buybacks in India: Regulations and Tax Implications

Share Buyback in India: Latest Updates on Company Activities, Regulations, and Taxation

Indian companies are actively pursuing share buybacks, while regulatory and taxation landscapes are also seeing significant shifts. Here's a roundup of the latest updates as of May 2025:

Key Regulatory Updates from SEBI:

The Securities and Exchange Board of India (SEBI) has been revamping the regulations governing share buybacks:

· Phasing out of Open Market Buybacks: A significant change is the systematic phasing out of buybacks through the stock exchange (open market) route. From April 1, 2025, this method will no longer be available to any company, except for cases where the buyback offer had already opened on or before March 31, 2025.   

o The limits for open market buybacks were progressively reduced:

§ 15% of paid-up capital and free reserves till March 31, 2023.

§ 10% of paid-up capital and free reserves till March 31, 2024.

§ 5% of paid-up capital and free reserves till March 31, 2025.   

· Increased Utilisation and Timelines for Open Market Buybacks (until phased out):

o Minimum utilization of the amount earmarked for open market buybacks was increased to 75% (from 50% previously).

o At least 40% of the earmarked amount must be utilized within the initial half of the specified duration.

o Timelines for the closing of open market buyback offers were also revised and shortened based on the opening date.   

· Tender Offer Route Changes:

o Companies using the tender offer route can increase the maximum buyback price and decrease the number of securities to be bought back (up to one working day before the record date), provided the aggregate size of the buyback remains unchanged.   

o The tendering period for shareholders has been reduced from 10 working days to 5 working days.

o Verification of offers and payment to shareholders/return of unaccepted shares must be completed within five working days from the closure of the tendering period.

· Other General Requirements:

o A company cannot buy back more than 25% of its paid-up capital and free reserves.

o If the buyback is less than 10% of the net worth, only board approval is needed; otherwise, a special resolution by shareholders is required.

o The buyback must be completed within one year from the date of approval.   

o Consent from lenders is necessary if there is a breach of any covenant with them.   

Latest Updates on Taxation of Share Buybacks in India:

The taxation rules for share buybacks have undergone a crucial amendment:

· New Rule from October 1, 2024: As per the Finance Act, any amount received by a shareholder from a company on the buyback of shares on or after October 1, 2024, will be treated as a dividend in the hands of the shareholder and taxed accordingly at their applicable slab rate.   

· Capital Loss for Shareholders: The cost of the shares that are bought back by the company will be treated as a capital loss for the shareholder. This capital loss can be set off against other capital gains.   

· Shift in Tax Liability: Prior to this change (and for buybacks before October 1, 2024), the company was liable to pay a buyback tax (around 20% plus surcharge and cess on the distributed income), and the amount received by shareholders was generally tax-free in their hands. The new rule shifts the tax incidence from the company to the shareholder for buybacks post the specified date.   

· ITR Form Updates for AY 2025-26: The recently notified Income Tax Return (ITR) forms for the Assessment Year 2025-26 (Financial Year 2024-25) reflect these changes. For instance, updated ITR forms (like ITR-2, ITR-5, ITR-6, and ITR-7) require specific reporting for:   

o Buyback proceeds from October 1, 2024, to be declared under 'Income from Other Sources'.   

o Reporting capital gains from buybacks as 'nil' consideration in the capital gains section, effectively allowing the claim of a notional capital loss.   

o Separate reporting of capital gains arising before and after July 23, 2024, due to changes in tax rates and indexation benefits.

These updates indicate a dynamic environment for share buybacks in India, with companies continuing to use this route for capital restructuring and shareholder returns, alongside evolving regulatory and tax frameworks. Investors should stay informed about these changes when considering participation in buyback offers.