Infosys Buyback Window Opens Today: Record Repurchase Size, New Tax Rules — Should You Participate?

Infosys Ltd. on Thursday opened the window for its largest-ever share buyback program worth Rs 18,000 crore that will test investors' appetite under a newly implemented and stricter tax regime.

The Bengaluru-based IT company is offering to buy back shares at Rs 1,800 apiece, which is a significant premium over the current market price, thus giving retail investors the opportunity to make a quick profit on their holdings.

Infosys' Rs 18,000 crore share buyback program, which is twice the size of their last two buybacks, represents 2.4% of the company's total equity.

The entitlement ratio, which is the minimum number of shares a company will accept in a buyback, is expected to be around 18 shares per 100. This could fall further if retail participation remains buy.

However, keeping in mind the new tax and stricter tax policy, which deems income from buyback as deemed dividend, is it a good idea for a retail investor to participate in Infosys' latest buyback? Let's take a closer look.

For a start, it is important to understand the lure of the Rs 1,800 per share buyback offer, which is a significant premium over the 2024 average trading price of Rs 1,704. But it must be weighed against the new fiscal reality.

That is because the tax burden on share buybacks has shifted directly from the company to individual shareholders, as of Oct. 2024.

What does this mean? The entire proceeds received by the shareholder will be deemed as 'deemed dividend' as mentioned earlier and will be taxed according to the investor's applicable tax slabs.

Under the new regime, this could range from anywhere between 5-30%, which in turn, significantly erodes the headline premium.

If we crunch the numbers further, it must be noted that for retail shareholders, Infosys has reserved 15% of the buyback, totaling Rs 2,700 crore. However, entitlement ratio will decide the final returns.

If participation mirrors previous buybacks, the entitlement ratio could be around 18%.

But the math depends on an investor's entry point. If an investor had accumulated shares in 2023 with an average buying price of Rs 1,417, they could stand to see the highest gross gains of approximately 13.5%, assuming an optimistic 50% acceptance ratio.

If we now add the new tax rules, those gains shrink massively. For a shareholder in the 20% tax bracket, that 13.5% gross gain will dwindle to 10.5% net gain over a two-year holding period.

In a likely scenario of an 18% acceptance rate, that gain whittles down to gross gains of up to 4.9% before tax.

Hence, it is perhaps fair to point out that while the buyback size is enormous, the 'deemed dividend' rule means investors must be wary and calculate their post-tax returns based on their respective tax slabs, before tendering in their shares.