DECODING THE BUYBACK PUZZLE: WHY EVEN A PREMIUM PRICE CAN HURT RETURNS

Till 30 September 2024, acompany buying back shares paid 10% tax while shareholders were exempt. From | October 2024, tax laws were amended, making any amount received bya shareholder forselling shares back to the company taxable as dividend income. The cost of bought-back shares is allowed asa capital loss.

- Gautam Nayak

These provisionsare harsh, First, the amountreceived istaxed asa dividend even if the buyback is not from company profits. Second, the shareholder pays tax at her marginal rate (often 35% ormore), while the capital loss (if long-term) can generally beset off only against long-term capital gains, with tax savings of at most I4.95%. These rules apply even tolisted-company buybacks.

Post-tax returns

Is it worthwhile to offer shares in a buyback, even when the buyback price is above the market price? Take Infosys’ offer: while the market price is around 31,500, the buyback is31,800.

Itseemsattractive, but the tax liability changes the picture.

If100 shares are bought back, the shareholder would receive 31,80,000, on which she would pay income tax of around 61,236 (34.02%, assuming she falls in the 10% surcharge bracket, with income between %50 lakh and 21 crore). Ifbought at %1,000 each and held for more thana year, she can claima long-term capital loss of %1,00,000, saving capital gains tax of 714,950. The net amount left in her hands is %1,33,714.