Any income received by the shareholder on such buy-back is fully exempt in their hands.covered by Section 115QA

 If a company’s buy-back of shares is covered by Section 115QA (i.e., the company itself pays buy-back tax), any income received by the shareholder on such buy-back is fully exempt in their hands.

How It Works in Practice

  1. Company pays buy-back tax

    • Section 115QA levies 20% tax (plus surcharge & cess) on the difference between the buy-back price and the issue price of the shares.

    • This tax is paid by the company, not the shareholder.

  2. Shareholder exemption

    • Section 10(34A) says that any income arising to a shareholder on account of a buy-back referred to in section 115QA shall be exempt.

    • This means no capital gains tax for the shareholder, regardless of holding period or cost of acquisition.

Example

  • Issue price: ₹200/share

  • Buy-back price: ₹500/share

  • Gain per share: ₹300

  • Company buys back 1,000 shares:

    • Taxable distributed income for company = ₹300 × 1,000 = ₹3,00,000

    • Company pays buy-back tax @ 20% = ₹60,000 (+ surcharge & cess)

  • Shareholder receives ₹5,00,000 → fully tax-free under Section 10(34A).

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