Under the Income Tax Act, 1961, Sections 115QA to 115QC impose a tax on distributed income when a domestic company buys back its own shares from shareholders. This provision was introduced to prevent tax avoidance through buyback schemes.
1. Applicability (Section 115QA)
✅ Applies to:
- Domestic unlisted companiesbuying back their own shares.
- Listed companiesif buyback is not through open market (i.e., tender offers).
❌ Does not apply to:
- Buyback by listed companies through open market(covered under capital gains tax for shareholders).
- Buyback by foreign companies.
2. Tax Rate & Computation (Section 115QA)
- Tax Rate: 20%(+ surcharge + 4% cess) on the distributed income.
- Distributed Income= Consideration paid by the company – Amount received by the company at the time of share issuance.
Example:
- Issue Price (Face Value + Premium)= ₹100 per share
- Buyback Price= ₹500 per share
- Distributed Income per share= ₹500 – ₹100 = ₹400
- Tax @20%= ₹80 per share (+ surcharge & cess).
Effective Tax Rate:
- 88%(if company turnover > ₹1 crore).
3. Compliance Requirements (Section 115QB & Rule 40BB)
- Payment of Tax:
- Company must pay tax within 14 daysfrom:
- Date of payment to shareholders(for tender offers).
- Date of extinguishment of shares(for open market buybacks).
- Filing of Return:
- Form No. 66must be filed within 14 days of tax payment.
- TDS Exemption:
- No TDSis deducted from shareholders since tax is paid by the company.
4. Tax Treatment for Shareholders (Section 115QC)
- Shareholders are exemptfrom tax on buyback proceeds (since the company pays tax).
- No capital gains taxapplies to shareholders under Section 46A.
5. Penalties for Non-Compliance
- Late Payment Interest: 1% per month(Section 115QB).
- Non-Filing Penalty: Up to ₹1 lakh(Section 271C).
6. Comparison with Capital Gains Tax (Listed Companies)
| PARAMETER | UNLISTED (SECTION 115QA) | LISTED (CAPITAL GAINS TAX) |
| Tax Rate | 20% (+SC+cess) on company | 10% (LTCG) or 15% (STCG) on shareholder |
| Tax Payer | Company | Shareholder |
| TDS | Not applicable | 10% if gains > ₹1 lakh |
