Section 10(34A) of the Income Tax Act provides a tax exemption for shareholders on income received from a buy-back of shares by a domestic company, but only under specific conditions.
What’s Exempt:
- Any income arising to a shareholder from a buy-back of shares by a domestic company is exempt in the hands of the shareholder, provided the company has paid tax on such distributed income under Section 115QA.
Why This Exists:
- Section 115QA imposes a 20% tax (plus surcharge and cess) on the company for buy-back transactions.
- To avoid double taxation, Section 10(34A) ensures that the same income is not taxed again in the hands of the shareholder.
Example:
Suppose ABC Ltd. buys back shares from its shareholders and pays ₹10 crore in consideration. If the company originally issued those shares for ₹4 crore, the distributed income is ₹6 crore. ABC Ltd. pays tax on this ₹6 crore under Section 115QA.
Now, if Mr. Mehta, a shareholder, receives ₹1 crore from this buy-back, the entire ₹1 crore is exempt in his hands under Section 10(34A)—because the company has already paid tax on the distributed income.
Important Note:
This exemption does not apply if the buy-back is not covered under Section 115QA—for example, in the case of listed companies before the 2019 amendment or foreign companies.
