Infosys Buyback: Tax Burden Shifts To Shareholders — Here's How

The much-awaited Infosys share buyback is here, but investors need to be clear on how taxation will play out. Unlike earlier, where companies bore the tax burden, the law now treats buyback proceeds as dividend income in the hands of shareholders, not capital gains.

Under the current rules, buyback proceeds are taxed as dividend income. Infosys will deduct a 10% TDS on the payout. No other tax will be paid by the company. Instead, shareholders themselves will be taxed based on their income slab — for instance, 20% or 30%. At the same time, the original cost of the shares is treated as a capital loss, but this can only be set off against other capital gains, not against dividend income.

For Infosys shareholders, the math looks like this. The buyback offer price is Rs 1,800 per share. After deducting 10% TDS, or Rs 180, the net payout works out to Rs 1,620 per share. However, taxation applies on the full Rs 1,800.

For someone in the 20% slab, the tax would be Rs 360, while for those in the 30% slab it rises to Rs 40. The cost of acquisition will be treated as a capital loss, which can only be adjusted if the shareholder has other capital gains to offset it.

This treatment creates a clear divide in incentives. Shareholders in higher tax brackets are disadvantaged, as the full Rs 1,800 is subject to a higher tax outgo, with only limited relief from the capital loss adjustment.

On the other hand, investors in lower tax slabs or with minimal taxable income stand to gain, as the same Rs 1,800 is taxed at little or no rate, while still allowing them to book a capital loss for potential future set-off.

In effect, Infosys' buyback is likely to prove far more tax-efficient for small investors than for high-net-worth individuals.