Many companies are now announcing share buybacks, and to understand this trend, we first need to know what a buyback is. A buyback refers to a company purchasing its own shares from shareholders. These companies, listed on the stock market, offer to buy back shares from investors, often at a price higher than the market rate. In return, shareholders receive cash for the shares they sell.
Now a question may flock into your mind that why does a company come up with buyback?
Companies resort for a buyback for many reasons. However, there are two big reasons in most cases
- Companies with excess cash can spend it to buy their shares back which improves the investor confidence in the company
- They want to reward existing shareholders for their trust in the company When the company feels that that their shares are undervalued, a buyback can boost their value.
- When the company feels that that their shares are undervalued, a buyback can boost their value.
In case of Mr. Chandu, the tax is more as compared to the tax applicable to the company, however the tax is lesser in case of Mr. Bandhu.
As you can see how the new buyback tax rules are unfavourable for high-income investors, increasing their tax burden by about. On the flip side, low-tax bracket investors benefit making buybacks more attractive for them.
And this effectively means that the new tax rule will be hurting the higher-income shareholders the most, with the top shareholders like promoters and big investors of companies getting taxed at a higher rate. And that would also make companies prepone their buy back plans, if any, before October.
In order to avoid higher taxes for their most valued shareholders, and bring in more shareholder value when they can, companies are trying all they can to complete their buybacks before October.
Now, if you have carefully read till now, you would have noticed that the buyback receipt will be taxed as dividend, now a natural question arises is what will happen to the purchase price of these shares, this cost would be considered a loss. You can adjust it against your other capital gains to lower your taxable income.
For example, if you have a capital gain of ₹60,000 in the same year, you won’t pay any tax on that gain since it’s offset by the ₹1,00,000 capital loss from the buyback and the remaining ₹40,000 loss can be carried forward and used to offset future gains for up to eight years until it’s fully utilised.
This new rule would may also encourage companies to pursue buybacks only when they feel that their shares are genuinely undervalued.
