Under the current regime, money you receive in a share buyback is taxed in your hands as dividend income, at your slab rate, while bonus shares cost you nothing when allotted, so their entire sale price later is treated as gain. Both rules have sharp edges worth understanding before you act on either corporate action.
How did buyback taxation change?
For several years, the company doing the buyback paid a special buyback tax, and whatever the shareholder received was exempt. You tendered your shares, took the cash, and reported nothing. That arrangement has been replaced. For buybacks after the changeover, the entire amount the company pays you is treated as a deemed dividend, added to your income, and taxed at your slab rate, and, like ordinary dividends, it can suffer TDS at the rate that currently applies.
Notice what that means: it is the whole payout that is taxed, not just your profit. If Harpreet bought shares of Godavari Ceramics at ₹400 and tenders them in a buyback at ₹500, his taxable dividend is the full ₹500 per share, not the ₹100 gain.
So what happens to his ₹400 cost? It is not lost. The cost of the tendered shares becomes a capital loss, which he can set off against capital gains under the usual rules and carry forward if unused. The mechanics of set-off follow the same framework described in what short-term and long-term capital gains are.
Because this regime changed recently and the details are precise, verify the current rules (including exactly which buybacks the new treatment covers) before tendering. For the process itself, see what a share buyback is.
How are bonus shares taxed?
Not at all when you receive them. A bonus issue is not income. The tax story starts when you sell, and it turns on two facts about every bonus share:
- Its cost is zero. You paid nothing, so the full sale price is capital gain.
- Its holding period starts on the allotment date, not when you bought the original shares.
Suppose Lakshmi holds 100 shares of Sundar Textiles bought two years ago at ₹300, and receives a 1:1 bonus. She now has 200 shares. If she sells the 100 bonus shares three months after allotment at ₹180, the entire ₹18,000 is a short-term gain (zero cost, and a holding period counted only from allotment) even though her original investment is old. Her original 100 shares keep their ₹300 cost and their original purchase date.
This split also explains a common shock: the market price halves around a 1:1 bonus, so someone who sells the original shares soon after may book a paper loss on them while sitting on zero-cost bonus shares. Traders have historically used that pattern aggressively around bonus dates, and tax law contains anti-avoidance provisions that can disallow such engineered losses. Another reason to take advice before trading around a bonus. Your holdings screen has its own version of this confusion, covered in why P&L looks wrong after bonus and split shares.
Things to keep in mind
- In a buyback, compare the slab tax on the whole payout against simply selling in the market and paying capital-gains tax, the better route differs by person.
- The capital loss generated in a buyback is only useful if you have, or will have, gains to set it against.
- Bonus shares sold soon after allotment produce short-term gains on the full sale price; plan the selling order of old versus bonus lots.
- Both regimes carry recently changed or intricate rules, confirm the current position with a tax professional before tendering or selling.
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