Infosys buyback: What it means for investors and their tax bills

Infosys’ latest share buyback has investors taking a closer look at how much they will actually pocket after taxes. Under the company’s offer, shareholders who choose to tender their shares may face higher tax liabilities, particularly those in higher income brackets, due to changes in the buyback taxation rules that came into effect from October 2024.

The IT giant has announced a buyback price of Rs 1,800 per share, representing a 16.6% premium over the September 19 closing price of Rs 1,544 on the BSE. While the premium makes the buyback tempting, tax implications could significantly reduce the net proceeds for certain shareholders. Experts caution that, for long-term investors, selling on the open market and paying capital gains tax might be more advantageous than tendering shares in the buyback.

Understanding Buybacks

A buyback occurs when a company purchases its own shares from existing shareholders, thereby reducing the number of shares in circulation. Companies pursue buybacks for various reasons: to boost earnings per share (EPS) by lowering the share count, improve shareholder value, prevent hostile takeovers, or deploy surplus cash efficiently. Historically, companies bore the tax burden on buybacks, but rules have changed. Since October 2024, the tax liability has shifted to shareholders.

How tax works on buybacks

The Union Budget of July last year introduced a significant change. Earlier, companies were liable to pay a buyback distribution tax, but now the entire amount received by the shareholder is considered dividend income and taxed according to their income tax slab.

For example, assume an investor purchased Infosys shares at Rs 1,000 per share and tenders them in the buyback at Rs 1,800 per share. The entire Rs 1,800 is treated as income in the hands of the shareholder. The company deducts 10% TDS, which in this case is Rs 180, leaving the investor with Rs 1,620 upfront. For non-resident shareholders, the TDS rate is 20% or the applicable treaty rate.

However, the TDS may not fully cover the tax liability. If the investor falls under the 15% marginal tax slab, she will need to pay an additional 5% tax on Rs 1,800, amounting to Rs 90, under “Other Income.” Thus, the net benefit reduces further.

Before October 2024, companies were responsible for paying a 20% buyback distribution tax (plus surcharge and cess) on the difference between the buyback price and the original issue price. With the new rules, shareholders shoulder the tax burden, making buybacks less efficient for high-income investors compared to capital gains strategies.

Calculating net gains

Whether a buyback is beneficial depends on the premium offered versus tax costs. Dhruv Chopra, managing partner at Dewan P N Chopra and Co., explains: “If the premium offsets the tax outflow, the buyback may still be attractive compared to selling on the exchange.” Capital gains on long-term holdings are taxed at 12.5%, and no rebate under Section 87A is available. However, dividend income from buybacks qualifies for a rebate if total income is below ₹12 lakh. Investors must carefully calculate post-tax returns to decide whether to participate.

Step       | Description                                | Calculation / Details
-----------|--------------------------------------------|--------------------------------------------------------------
Step 1     | Buyback Announcement                        | Buyback price: Rs 1,800 per share
           |                                            | Investor purchase price: Rs 1,200 per share
-----------|--------------------------------------------|--------------------------------------------------------------
Step 2     | Treatment as Dividend Income                | Dividend income = Rs 1,800
           |                                            | TDS @ 10% = Rs 1,800 × 10% = Rs 180
           |                                            | Net payout to investor = Rs 1,800 − Rs 180 = Rs 1,620
           |                                            | Non-resident TDS: 20% or treaty rate
-----------|--------------------------------------------|--------------------------------------------------------------
Step 3     | Additional Tax Liability                    | Investor in 15% slab:
           |                                            | Remaining tax = 15% − 10% TDS = 5%
           |                                            | Extra tax = Rs 1,800 × 5% = Rs 90
           |                                            | Tax classification: “Other Income”
-----------|--------------------------------------------|--------------------------------------------------------------
Step 4     | Historical Comparison                       | Before Oct 2024: Company paid 20% buyback distribution tax + surcharge & cess on gain (buyback price − issue price)
           |                                            | After Oct 2024: Tax liability shifted to shareholder

What should investors do?

Infosys’ past buybacks have often been at a premium, creating short-term opportunities for retail shareholders. Yet, acceptance ratios matter; not all shares may be accepted if retail participation is high. Narendra Solanki, head of Fundamental Research at Anand Rathi Shares and Stock Brokers, advises: “Short-term investors may find buybacks attractive, but long-term shareholders can benefit more by holding onto shares, given Infosys’ robust cash flows, consistent dividends, and sector leadership.”