The calendar year 2025 has seen a very sharp fall in the volume of buybacks. As of end-October, India had seen buyback deals of just ₹916 crore, which is a full 95% lower than the same period of last year. The reasons are not far to seek. Effective from October 2024, the new buyback taxation rules have come into effect. While Infosys had announced a massive buyback  plan, the promoters of the company had abstained from being part of the buyback. The  reason was an unfavorable tax treatment of buybacks.  

Prior to October 2024, the buybacks were treated as tax-neutral in the hands of the investors. The amount you earn from buyback of shares was entirely tax-free in the hands of the investor. It was the company in question that paid the tax on the buyback. This was similar to the old dividend distribution tax model, wherein the company paid tax on the dividend paid. However, even Finance Ministry was not too happy as the model was unfair to continuing shareholders and the burden was also borne by the shareholders who did not participate in the buyback. Hence the taxation shift. 

With the government classifying the dividend income as other income and taxing at peak rates, the buyback taxes also shifted. However, there was a big difference. In the case of buyback, the total proceeds of the buyback would be treated as dividend income and taxed in the hands of the investor in the year as other income at peak rates. Against the gains, investors were allowed to write off the cost of purchase as loss (either LT or ST). Now, you cannot write off the loss against dividend income, but only against other capital gains. That is what is creating a big problem. Dividend tax is being paid immediately, while write-off benefits come much later to you. 

The old model of making the company pay taxes on buyback gains is patently unfair to the continuing shareholders. That argument is correct. However, the new rule is making the entire idea of a buyback unattractive. That is evident from the sharp fall in the buybacks in the current year. One way is to treat the buyback as capital gains, so anybody who holds the shares for more than 1 year pays only the concessional tax of 12.5% on the capital gains. That is a more rational way of doing things. That is likely to keep the system fair, and also encourage the companies to buy back shares. There is an urgent need to find a more rational, workable solution!