Under the existing provisions, the entire amount received on a buyback is treated as dividend income and taxed at the shareholder’s applicable tax rate. “For high-income individuals, the tax rate is 30 per cent plus applicable surcharge and cess,” said Dhruv Chopra, managing partner, Dewan P N Chopra and Co.
Current provisions do not allow a deduction for the cost of acquisition. “However, the purchase cost of such shares is allowed as a capital loss, which can only be set off against capital gains or carried forward to future years,” said Prashant Bhojwani, partner, corporate tax, tax and regulatory services, BDO India. In practice, taxpayers cannot always avail of these set-off provisions.
Under the proposed changes, shareholders can deduct the cost of acquisition of shares from the buyback amount. “Only the net amount will be taxed as capital gains,” said Bhojwani. This is expected to lower the overall tax liability.
The tax treatment will depend on the holding period. If the gains qualify as long-term capital gains (LTCG), the tax rate will be 12.5 per cent. If they qualify as short-term capital gains (STCG), the tax rate will be 20 per cent. Only LTCG exceeding ₹1.25 lakh is taxable.
“These changes may be beneficial for minority shareholders who are not treated as promoters and hold 10 per cent or less (directly or indirectly) of the company’s shareholding,” said Chopra.
Investors in higher tax brackets stand to gain, especially if they have held the shares for more than one year.
Secondary market SGB buyers to pay tax
The Budget has proposed that Sovereign Gold Bonds (SGBs) will remain exempt from capital gains tax on maturity only if they are bought in the original issue and held until redemption by the individual investor. This rule will apply uniformly across all SGB series issued by the Reserve Bank of India.
Earlier, capital gains arising on redemption of SGBs at maturity were exempt for all individual holders, regardless of whether the bonds were purchased during the initial offering or from the secondary market.
“Investors who acquired bonds through stock exchanges or secondary transfers will lose the tax-free status on their maturity proceeds, reducing their overall net returns,” said Abhishek Kumar, Sebi-registered investment adviser and founder of SahajMoney.com.
Such investors will now have to pay tax on capital appreciation at maturity, typically at the LTCG rate of 12.5 per cent, without indexation benefits for holdings exceeding one year. “Investors who bought SGBs from the secondary market should prepare to pay capital gains tax on their SGB portfolios,” Kumar added.
The writer is a Mumbai-based independent journalist
 "Investors in higher tax brackets stand to gain, especially if they have held the shares for more than a year. | Image: Shutterstock")