Tax tweak may tilt Infosys buyback in favour of retail, mutual funds

Tech major to repurchase 100 mn shares at Rs 1,800 - 18% above current price

A recent change in tax rules for share buybacks could benefit small and institutional investors of Infosys. The Bengaluru-based information technology (IT) giant has announced a ₹18,000 crore share repurchase programme. 

Market experts anticipate a buyback acceptance ratio exceeding 20 per cent, as higher tax liabilities may discourage wealthy shareholders from tendering their shares. 

Infosys promoters, including Narayana Murthy and Chairman Nandan Nilekani, have already confirmed they will not participate in the buyback. Other wealthy shareholders may follow suit. 

A 20 per cent acceptance ratio would mean those tending 100 shares in the buyback may see their 20 shares getting accepted under the buyback programme. With an eye to this arbitrage opportunity, several savvy investors were seen lapping up shares of Infosys, which drove its stock price 4 per cent higher to ₹1,529. 

Quant analysts said that by creating neutral positions using the derivatives market, mutual fund (MF) arbitrage schemes can pocket gains of 2-3 per cent on the current price dynamics. 

Under the latest buyback, Infosys will buy back 100 million shares — 2.41 per cent of its outstanding shares — at ₹1,800 each, a premium of 18 per cent over the current market rate. 

In October 2024, the government shifted the buyback tax burden from companies to shareholders, aiming to remove the tax arbitrage previously exploited by some investors between buybacks and dividends, which are both now taxed as income for recipients.

 

Before this change, companies paid a 20 per cent buyback distribution tax. Under the current framework, proceeds from tendering shares in a buyback are treated as dividends and taxed according to the investor's income tax slab. Meanwhile, the cost of acquiring those shares can be treated as a capital loss, offsetting capital gains in the current or future years, up to eight years.

 

For small shareholders, tax rates on buyback proceeds range from 5 per cent to 20 per cent. However, ultra-high-net-worth individuals may face tax rates of nearly 40 per cent.

 

Equity-oriented MFs typically treat buyback proceeds as business income or capital gains for tax purposes.

 

“Under the new regime, tendering shares in a buyback may not be tax-efficient for higher-income investors, since the full amount received is treated as dividend income and taxed accordingly. Selling shares in the open market would generally attract capital gains tax only on profits, often resulting in a lower tax burden,” explained Hitesh Sawhney, partner at Price Waterhouse & Co.

 

“However, investors in lower tax brackets may still find tendering shares worthwhile, especially when buybacks are offered at a significant premium over market price,” he added.

 

To illustrate: an individual shareholder tenders 10 shares at ₹1,800 in the Infosys buyback. The entire gain of ₹18,000 will be treated as dividend income. If the investor falls in the highest 36 per cent (excluding cess) income tax slab, he will need to pay in excess of ₹6,500 as tax classified as “other income”. Assume, these 10 shares were purchased at ₹10,000, which will be recorded as a capital loss, which can be set off against capital gains.

 

Experts said those under the highest tax bracket will be better off selling in the open market, where the gains could attract between 12.5 per cent and 20 per cent capital gains tax.

 

Infosys has yet to announce the record and buyback dates. The latest buyback was unveiled in September. This marks the company’s fifth buyback in the last decade. 

 

IN A NUTSHELL

 

Buyback size: ₹18,000 crore

 

Purchase price: ₹1,800 apiece

 

Amount of shares: 100 million, or 2.4 per cent equity

 

Current price: ₹1,529 apiece

 

Record date: To be announced

 

Buyback dates: To be announced