In a significant shift brought by the Finance Act (No. 2), 2024, the taxation regime for share buybacks in India has undergone a major transformation. With the repeal of Section 115QA effective from October 1, 2024, the landscape of tax-efficient remuneration and profit distribution for promoters, shareholders, and key employees has changed dramatically.
Let’s explore how the three primary methods of wealth extraction from a company—Share Buybacks, Dividends, and Salaries—compare under the new rules.
1. Share Buybacks: A Tax-Heavy Turnaround
Old Regime:
Under Section 115QA, companies (both listed and unlisted) were taxed at an effective rate of ~23% on distributed income arising from buyback, while shareholders received the proceeds tax-free.
New Regime (Post October 1, 2024):
- Section 115QA repealed.
- Buyback proceeds now treated as deemed dividend u/s 2(22)(f).
- Shareholders taxed as per their applicable income tax slab.
- No exemption under Section 10(34A).
- No deductions allowed under Section 57.
- TDS at 10% for residents and applicable rates for non-residents.
Implication:
Buybacks are now treated like regular income, making them less tax-efficient, especially for those in higher tax brackets.
2. Dividends: Consistently Taxed at Shareholder Level
Key Features:
- Since the abolition of Dividend Distribution Tax (DDT) in FY 2020-21, dividends are taxable in the hands of shareholders.
- Taxed at applicable slab rates for individuals.
- TDS applicable u/s 194 at 10% for residents.
Implication:
Dividends continue to be a straightforward method of profit distribution, but not necessarily tax-advantageous. They are now comparable with buybacks in tax treatment.
3. Salaries: Structurable but Costly
Key Features:
- Taxed as per applicable slab rates.
- Subject to provident fund, gratuity, and other statutory obligations.
- Employer also bears cost of employer contributions.
Implication:
While salaries offer predictable tax treatment and can be structured with allowances and perquisites, they can be expensive for the company due to additional statutory costs.
Tax-Efficiency Matrix (Post-October 2024)
| Method | Tax Payer | Tax Rate | Deductibility for Company | Additional Costs |
|---|---|---|---|---|
| Buyback | Shareholder | As per slab | No | TDS at 10% |
| Dividend | Shareholder | As per slab | No | TDS at 10% |
| Salary | Employee | As per slab | Yes | PF, Gratuity etc. |
Conclusion
With the tax parity between dividends and buybacks post-Finance Act 2024, the choice narrows down to strategic planning. For promoters and significant shareholders, structuring a balanced mix of moderate salary and dividend income might yield optimal results.
