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Infosys Buyback of Shares: A Note on the Tax Angle

A share buyback, or share repurchase, is a corporate action where a company buys its own shares from the open market or directly from its shareholders. Infosys has historically used buybacks as a key part of its capital allocation strategy, and the company recently announced its largest-ever buyback. This move is generally aimed at returning surplus cash to shareholders, improving key financial metrics like Earnings Per Share (EPS) and Return on Equity (ROE), and signaling management's confidence in the company's future.

However, a critical aspect for investors to consider is the tax implications, which can significantly impact the net return on their investment. Recent changes to India's tax laws have altered the tax landscape for share buybacks, and this may make a buyback less attractive for certain shareholders, particularly those in higher income tax brackets.

The Evolving Tax Framework for Share Buybacks in India

Historically, the taxation of share buybacks has undergone several changes. A significant shift occurred in the Finance (No. 2) Act, 2024, which became effective from October 1, 2024. This new framework has a direct bearing on why a buyback might not be a good option for some shareholders.

• Before the Amendment (pre-October 1, 2024): Up until this date, the company was responsible for paying a buyback tax under Section 115QA of the Income Tax Act. This tax was levied on the "distributed income," which was the difference between the buyback price and the issue price of the shares. The shareholder, in turn, received the buyback proceeds tax-free under Section 10(34A). This made buybacks a tax-efficient way for companies to distribute cash to shareholders, as the tax burden was borne by the company at a fixed rate, and shareholders faced no additional tax liability.

• After the Amendment (post-October 1, 2024): The new rules have completely reversed this position. Effective from October 1, 2024, the tax on share buybacks is no longer levied on the company. Instead, the entire consideration received by a shareholder from a buyback is now treated as a "deemed dividend" under Section 2(22)(f) of the Income Tax Act.

Why the Tax Angle May Make an Infosys Buyback a Poor Option

This shift in tax policy means that the gains from a buyback are no longer tax-exempt for the shareholder. The entire amount received is now considered income and is taxed in the hands of the shareholder under the head "Income from Other Sources." This has several key implications:

1. Taxation as per slab rate: Unlike the previous system where the company paid a fixed tax, the buyback proceeds are now taxed at the shareholder's individual income tax slab rate. This is particularly disadvantageous for high-net-worth individuals and those in the highest tax bracket (e.g., 30% and above, including surcharge and cess), as their effective tax rate on the buyback gains could be significantly higher than the previous buyback tax paid by the company.

2. No deduction for cost of acquisition: A major drawback is that the cost of acquiring the shares is not allowed as a deduction against the deemed dividend income. While the tax rules allow for a "notional" capital loss equal to the cost of the shares, this loss can only be set off against other capital gains and can be carried forward for up to eight years. This is not an immediate or guaranteed benefit, and it can be difficult to utilize for shareholders who do not have sufficient capital gains.

Conclusion

While a share buyback at a premium over the market price may appear attractive on the surface, the recent tax changes in India mean that shareholders must carefully consider the tax implications. The shift in the tax burden from the company to the individual shareholder, coupled with the taxation of the entire buyback amount at the individual's slab rate, can significantly diminish the net returns, especially for those in higher income brackets. While a buyback may still be a viable option for some, particularly for those in lower tax brackets or for those who can effectively utilize the notional capital loss, it is no longer the universally tax-efficient option it once was. As such, for many shareholders, an Infosys buyback may not be a good option from a tax perspective.

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