Infosys Buyback: Understanding the Higher Tax Burden for Shareholders

The taxation rules around buybacks in India have undergone a major transformation. For years, companies carried the responsibility of paying buyback tax whenever they repurchased their own shares. However, starting from October 1, 2024, the framework has shifted entirely. The recent Infosys buyback highlights this crucial change. Instead of the company bearing the tax liability, it is now the shareholders who must pay tax on the entire proceeds received from the buyback. This shift has significant implications for investors, altering the way they calculate returns from such corporate actions.

What Has Changed in the Buyback Taxation Framework?

Earlier, when a company like Infosys conducted a buyback, the company itself was required to pay tax on the distributed amount. This was considered a way to simplify the process and reduce the direct tax burden on individual shareholders. The new rules, however, have completely changed that approach.

From October 1, 2024, any amount received from a buyback is no longer taxed at the company level. Instead, it is taxable in the hands of shareholders. This means that every investor participating in a buyback will need to pay tax on the full consideration received.

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Buyback Proceeds Now Treated as “Deemed Dividend”

A critical element of the new rule is the classification of buyback proceeds. Under the latest guidelines, the amount received by shareholders during a buyback is considered a “deemed dividend.” This classification means it is taxable as income from other sources.

This distinction is important because “income from other sources” is taxed at the applicable income tax rates for the individual. In practice, it places buyback income in the same basket as interest income, lottery winnings, or any other form of miscellaneous income.

Shareholders Tax Burden Explained

For shareholders of Infosys and other companies conducting buybacks after October 1, 2024, the implications are clear. They must now include the entire buyback proceeds in their taxable income. Unlike capital gains tax, which is levied on the difference between the purchase price and the sale price, this taxation approach is harsher.

The shareholder does not benefit from indexation, long-term capital gains concessions, or other reliefs that typically apply to equity transactions. Instead, they pay tax on the full amount received as if it were a dividend payout. This could mean a substantially higher tax outgo depending on the individual’s income tax bracket.

Impact on Infosys Shareholders

Infosys is among the most prominent companies to have conducted buybacks under the new tax regime. The buyback attracted a significant number of retail and institutional investors. However, unlike earlier times when the company’s tax payment ensured tax-free income for investors, this time the scenario is different.

Every shareholder who tendered shares in the Infosys buyback will now have to pay tax on the full proceeds as part of their annual taxable income. The implications are particularly heavy for high-net-worth individuals and those in the higher tax slabs, where the rate of taxation could substantially erode the post-tax return from the buyback.

Why the Change Matters?

This change in taxation rules matters for several reasons. First, it alters the attractiveness of buybacks as a corporate action from an investor’s perspective. Earlier, buybacks were often viewed as a tax-efficient method of rewarding shareholders, especially compared to dividends. Now, with the new rules, buybacks lose that advantage.

Second, the shift also affects the overall market sentiment toward future buyback programs. Companies may still pursue buybacks to reduce equity capital or boost shareholder value, but the perception among investors could change if the post-tax benefits are significantly lower than before.

Taxation Framework Before and After October 1, 2024

To better understand the shift, it helps to look at the framework in two stages.

• Before October 1, 2024: The company conducting the buyback paid a buyback tax. Shareholders received the proceeds tax-free.

• After October 1, 2024: The company does not pay buyback tax. Instead, shareholders must declare the proceeds as a “deemed dividend” and pay tax on the entire amount.

This stark difference is at the heart of the current discussion around the Infosys buyback and its impact on investors.

Implications for Retail and Institutional Investors

Retail investors, who often participate in buybacks as a way to book profits or receive additional income, now face a heavier tax burden. For those in the lower tax brackets, the impact may be manageable, but for investors in higher brackets, the shift can significantly reduce their effective returns.

Institutional investors, such as mutual funds and insurance companies, will also be impacted. They must now account for the taxation of buyback proceeds as part of their annual income filings. This could alter the strategies of large institutional shareholders when evaluating participation in buybacks.

Broader Market Perspective

The changes in buyback taxation are not limited to Infosys alone. All companies conducting buybacks after October 1, 2024, are governed by the same framework. This signals a broader trend where shareholders must take greater responsibility for their tax liabilities in corporate actions.

The Infosys buyback serves as one of the earliest high-profile examples under the new system, making it a reference point for future transactions. Investors across the market will closely monitor how these tax changes affect the popularity and participation rates in buybacks.

Conclusion

The new taxation rules on buybacks, effective from October 1, 2024, have shifted the burden from companies to shareholders. In the case of Infosys, this has meant that investors who participated in its buyback are now liable to pay tax on the entire proceeds received. With buyback income being treated as “deemed dividend” and classified under “income from other sources,” the tax outgo can be substantial, particularly for those in higher tax brackets.

This regulatory shift fundamentally changes the perception of buybacks as a shareholder-friendly measure. While companies may continue to use buybacks as a tool to enhance value, investors must now factor in the higher tax costs before participating. The Infosys buyback has set the stage for how this new framework will operate in practice, serving as a reminder that taxation can dramatically alter the attractiveness of corporate actions.

Key Highlights

• New buyback tax rules apply from October 1, 2024.

• Companies no longer pay buyback tax; the burden shifts to shareholders.

• Shareholders are taxed on the entire buyback proceeds.

• Income from buybacks is treated as a “deemed dividend” under income from other sources.

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