Infosys has announced a share buyback at a price of Rs 1,800 per share, which is a 16.6% premium over its September 19 closing price. While this premium seems appealing, investors need to be aware of the tax implications that could significantly reduce their net earnings.
Thank you for reading this post, don't forget to subscribe!New Tax Rules for Buybacks
A major change in tax regulations, effective since October 2024, has shifted the tax burden from the company to the shareholder.
Before the change, the company paid a buyback tax, and the proceeds were tax-free for the investor. Now, the entire amount an investor receives from a buyback is treated as dividend income and is taxed according to their personal income tax slab.
Calculating Your Tax Bill
Here’s how the new tax rule works:
- TDS (Tax Deducted at Source): The company will deduct a 10% TDS from the buyback price (Rs 1,800). This means you will initially receive Rs 1,620 per share.
- Final Tax Liability: The 10% TDS is not the final tax. The full Rs 1,800 is added to your total income for the year. If your income tax slab is higher than 10%, you’ll owe additional tax. For example, if you are in the 15% tax bracket, you’ll have to pay an extra 5% tax on the Rs 1,800 when you file your returns.
Buyback vs. Open Market Sale
For long-term investors, the decision to participate in the buyback or simply sell their shares on the open market depends on a critical comparison of the tax implications.
- Buyback: The entire buyback amount is taxed as regular income, which can be as high as your top marginal tax rate.
- Open Market Sale: Selling your shares on the stock exchange results in a capital gain (the difference between the sale price and your original purchase price). This capital gain is taxed at a much lower rate, typically 12.5% for long-term holdings.
For investors in higher tax brackets, selling on the open market and paying the lower capital gains tax may be more profitable than tendering shares in the buyback, even with the premium offered.
Ultimately, the choice depends on your individual tax situation and whether the premium is substantial enough to offset the higher tax liability.
