Income arising to a Shareholder on account of Buy Back of Shares [Section 10(34A)]

Exempted Incomes-Section 10(34A)

Income arising to a shareholder on account of Buy Back of Shares is governed by Section 10(34A) of the Income Tax Act. This section provides certain exemptions and tax benefits to shareholders who receive income from the buyback of shares.

Buy Back of Shares refers to the process through which a company repurchases its own shares from its shareholders. This can be done for various reasons, such as returning surplus cash to shareholders, reducing the number of outstanding shares, or enhancing the value of remaining shares.

This exemption is available to both resident and non-resident shareholders. It is also available to all types of shares, including equity shares, preference shares, and redeemable preference shares.

Conditions for Exemption

There are certain conditions that need to be met in order to avail the exemption under Section 10(34A). These conditions include:

  • The buyback of shares must be approved by the company’s board of directors.
  • The buyback must be made in accordance with the provisions of the Companies Act, 2013.
  • The buyback must be made out of the company’s free reserves or securities premium account.
  • The buyback must be made through a recognized stock exchange.
  • The buyback price must not exceed the fair market value of the shares.
  • The company must pay buyback tax on the difference between the buyback price and the face value of the shares.

Example:

 

A shareholder holds 100 shares in a company with a face value of Rs. 10 each. The fair market value of the shares is Rs. 15 each. The company decides to buy back its shares at a price of Rs. 15 each.

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The shareholder sells his 100 shares to the company for Rs. 1500. The income arising to the shareholder from the buyback is Rs. 500 (Rs. 1500 – Rs. 1000).

Under Section 10(34A), the shareholder’s income of Rs. 500 from the buyback is exempt from income tax.

Conclusion

Section 10(34A) of the Income Tax Act provides a beneficial exemption to shareholders who receive income from the buyback of shares. By exempting this income from tax, the government aims to encourage investment in companies and provide tax relief to shareholders. It is important for shareholders to understand the conditions for availing this exemption and ensure compliance with the provisions of the Companies Act, 2013.

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