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Summary: Infosys’ buyback looks like a tax dampener. But what if we told you there’s a hack most investors are missing? The new rules seem to slash investor gains, but there’s a twist in the tax treatment that could still help you soften the blow. Find it in the story below.
When a company announces a buyback at a fat premium, it usually sets off investor excitement. Infosys has done just that. The Bengaluru-based IT company will repurchase shares worth Rs 18,000 crore through the tender route, offering Rs 1,800 a share, nearly an 18 per cent premium to its pre-announcement price. On paper, this looks enticing because the current market price is Rs 1,523.
But new taxation rules for buybacks change how much you pocket.
What has changed
Earlier, companies paid a buyback tax of around 23 per cent and shareholders received the proceeds completely tax-free. But after the Finance Act amendment, the tax burden has shifted to investors.
The buyback proceeds are now treated as income from other sources, meaning they are added to your total income and taxed at your respective slab rate. A flat 10 per cent TDS also gets deducted upfront by the business. For convenience, let’s ignore the TDS and look at how the slab-wise tax will affect your buyback proceeds.
Let’s say you have 10 shares of Infosys bought at Rs 1,500 each. You tender them in the buyback at Rs 1,800 each, realising Rs 18,000 (assuming they get accepted). Now, under the new rule, this entire realisation will be taxed at your income-slab rate.
So, if you fall in the 20 per cent slab, your net realisation is lower at Rs 14,400. For those in the 30 per cent slab, it will get trimmed to Rs 12,600. In effect, the higher your tax slab, the slimmer your buyback proceeds, meaning you won’t realise the entire premium like before.
But here’s a hack
While the buyback proceeds will be taxed as your income, the cost of your tendered shares, i.e., the price for which they were bought (Rs 15,000 in our example), can be treated as a capital loss, since the shares are extinguished.
You can use this loss to offset any capital gains you make elsewhere, let’s say, from selling other shares. If you don’t have gains right away, you can carry this loss forward for eight years.
Simply put, your Rs 15,000 purchase cost becomes a capital loss of Rs 15,000. If elsewhere you’ve booked a capital gain of Rs 20,000, you can set off this loss and pay tax only on the remaining Rs 5,000.
That way, while your buyback proceeds shrink due to slab taxation, the capital loss adjustment offers another route to soften the overall tax bite when you book gains elsewhere.
The bottom line
Buybacks are no longer the neat, tax-free windfall they once were. What investors now pocket depends squarely on their tax slab, and for many, the proceeds will be leaner than before. However, the consolation is that the purchase cost morphs into a capital loss, which can be set off against other gains.
So, should you tender your Infosys shares?
Buybacks, especially when offered at a premium, are enticing for investors who might want to gain from the arbitrage. The new tax treatment, though, makes the deal less attractive upfront.
More importantly, we have always been strong advocates for looking beyond short-term tailwinds. Hence, the real question investors should ask is whether Infosys is worth owning for the next 10 years.
That’s something we answer at Value Research Stock Advisor. Through our thorough fundamental research, we track listed companies closely, evaluate them across quality, growth, valuation and momentum and offer clear guidance on what to buy, hold, or sell based on data, not hype or headlines.
So to find out whether Infosys should be in your portfolio as a long-term bet or not, check out our buy recommendations at Stock Advisor.
Also read: How Kotak Bank investors got richer despite share dilution
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