- Buyback proceeds for individual investors drop to a flat 12.5% capital‑gains tax.
- Foreign promoters now face a 30% levy, while Indian promoters stay at 22%.
- Tax distortion that made buybacks a dividend substitute is being removed.
- Companies with heavy promoter stakes may curb buybacks, affecting cash‑return yield.
- Historical 2017 buyback boom shows how policy shifts drive market timing.
You’ve been overpaying on buyback profits – and the next budget fix changes that.
What the New Buyback Tax Framework Actually Changes
The 2024 Union budget reclassifies share‑buyback proceeds. Where they were previously deemed dividends taxed at slab rates up to 30%, they will now be treated as capital gains for non‑promoter shareholders. The tax rate for individual investors is a flat 12.5%, dramatically lower than the previous highest slab. For promoters, the regime is split: Indian promoters stay at a 22% rate, but foreign promoters are bumped to 30%.
This bifurcation removes the previous “double‑dip” advantage where a company could distribute cash via a buyback, let shareholders claim a capital‑loss on acquisition cost, and still enjoy a lower tax bill on the deemed dividend. By aligning the cost‑basis adjustment with the capital‑gains computation, the law restores economic neutrality.
Impact on Promoter vs Non‑Promoter Shareholders
Promoters—individuals or entities holding a controlling stake—have historically used buybacks as a tax‑efficient way to return cash without triggering dividend taxes. The new 30% levy for foreign promoters and the unchanged 22% for Indian promoters bring their effective tax rate close to ordinary income tax levels, eroding the incentive.
For the broad base of retail and institutional non‑promoter investors, the 12.5% rate is a sweet spot. It sits well below the top slab (30%) and even under the 15% long‑term capital‑gains rate that applies to listed equities held for over a year. The net effect: buybacks become a more attractive cash‑return tool for the masses, while promoters may pivot back to dividends or debt‑financing.
Sector‑Wide Ripple Effects: From Tata to Adani
Large, promoter‑heavy groups like Tata and Adani sit at the epicenter of this change. Tata Motors, with a promoter holding of roughly 20%, has historically used buybacks to smooth earnings per share (EPS) volatility. Under the new regime, any future Tata buybacks will be taxed at 22% for its Indian promoters, diminishing the net benefit. Consequently, Tata may prefer special dividends, which are taxed at the shareholder’s slab rate, or consider strategic debt issuance.
Adani Enterprises, with a higher promoter concentration, faces an even steeper disincentive. The foreign‑promoter surcharge (30%) will likely steer the conglomerate toward alternative capital‑return mechanisms, such as asset sales or dividend payouts, especially as its overseas financing arm grows.
Mid‑cap and small‑cap firms, often with dispersed ownership, stand to gain. A lower tax drag on buyback proceeds makes them more likely to initiate periodic repurchases, potentially boosting EPS and supporting valuation multiples.
Historical Perspective: 2017 Record Buybacks and Tax Arbitrage
In FY 2017, India recorded a staggering ₹55,273 crore in buybacks across 50 companies—a record driven by the then‑favorable tax treatment that allowed promoters to sidestep dividend taxes. The subsequent year, after a policy reversal in October 2022 that re‑designated buybacks as deemed dividends, the market saw a sharp slowdown in repurchase activity.
That swing proved that tax policy is a lever for corporate cash‑return strategies. The 2024 budget essentially completes the pendulum swing, but with nuance: it re‑enables buybacks for the non‑promoter crowd while penalizing promoter‑driven arbitrage.
Technical Primer: Capital Gains vs Deemed Dividends
Capital Gains are profits from the sale of an asset, taxed based on holding period. In India, long‑term capital gains (LTCG) on listed equities held >1 year attract 10% (plus surcharge) without indexation. The 12.5% flat rate proposed for buyback proceeds is effectively a short‑term capital‑gains rate, but applied uniformly to all buyback transactions.
Deemed Dividend is a tax construct where certain transactions—such as a share buyback—are treated as dividend distribution for tax purposes. The recipient is taxed at the individual’s income‑tax slab, which can be as high as 30% for high‑income investors.
By moving buybacks from deemed dividend to capital gain, the tax code eliminates the “double‑tax” scenario where the company’s profit is first reduced by the buyback expense and then the shareholder pays dividend tax on the same cash.
Investor Playbook: Bull and Bear Cases
Bull Case: Retail investors and diversified funds will see higher after‑tax returns from buybacks, prompting a wave of repurchase announcements. Companies with low promoter concentration may use buybacks to boost EPS, support share price, and reduce cost of capital. The lower tax drag also makes buybacks an efficient tool for managing capital structure without increasing leverage.
Bear Case: Promoter‑controlled firms may cut back on buybacks, leading to reduced EPS support and potential pressure on share prices, especially in high‑visibility stocks. If promoters shift to dividend payouts, the overall cash‑return yield may not improve, as dividends face higher tax rates for many investors. Additionally, the complexity of distinguishing promoter status could create compliance costs and uncertainty.
For a balanced portfolio, consider increasing exposure to non‑promoter heavy firms that are likely to ramp up buybacks, while scrutinizing promoter‑dominant names for dividend policy shifts. Keep an eye on quarterly reports for any announced buyback programmes and evaluate the post‑tax yield against alternative cash‑return options.