Infosys buyback: know the hidden taxation cost

On September 12, 2025, Infosys announced its biggest share buy-back programme ever, aiming to acquire 10,000 shares, which is about 2.41% of its paid-up equity share capital. The buy-back price is set at Rs 1,800, which is a 19% premium over the trading price on the date of announcement.

Even with this attractive offer, Infosys promoters chose not to sell their shares in the buyback. This reaffirms the promoters' faith in the company’s long-term growth story while increasing their control from 13.05% to 13.37%.

Another factor influencing the promoters’ decision not to sell their shares in the buyback is the tax implication. The tax considerations are equally important for other investors thinking about participating in this buyback initiative.

Tax treatment when shares are tendered in the buy-back
A buy-back occurs when a company repurchases its own shares from existing shareholders, typically at a premium to the current market prices. The tax treatment for such transactions has changed significantly since October 1, 2024.

Before this change, companies that conducted a buy-back had to pay a buy-back tax under Section 115QA, while shareholders were exempt from tax on the income they received. However, starting from October 1, 2024, this position has changed.

Under the new rules, the company no longer has to pay buy-back tax. Instead, the money received by shareholders is taxed as a “deemed dividend” under Section 2(22)(f) of the Income-tax Act, 1961.

This deemed dividend is taxed under the category of Income from Other Sources at the applicable rate, and importantly, the tax is levied on the gross amount received, not just the profit portion. Additionally, no deductions are allowed under Section 57 against this income. However, the cost of acquiring such shares (tendered in the buy-back) is treated as a capital loss.

The nature of this capital loss depends on how long these shares have been held. If you hold listed shares held for more than 12 months, it results in long-term capital loss (LTCL), while those held for 12 months or less, lead to short-term capital loss (STCL).

A short-term capital loss can be set off against both short-term and long-term capital gains in the same year, and any unabsorbed loss can be carried forward for eight years. In contrast, a long-term capital loss can be set off only against long-term capital gains but can also be carried forward for eight years.

So, shareholders taking part in a buy-back will need to:

• Offer the amount received as Income from Other Sources (deemed dividend) in their income tax return (ITR), and
• Record the cost of acquisition as a capital loss, to be set off against capital gains as permitted under the Act.

In case of bonus shares (which have nil cost of acquisition), there won’t be any capital loss since both the deemed sale value and the cost are zero.

Tax treatment when shares are sold after the buy-back
When shareholders choose not to participate in the buy-back and instead sell their shares later in the open market, the tax implication will depend on how long the shares were held.

If the shares are held for 12 months or less, the gain is considered short-term and is taxed under Section 111A at 20%. If the shares are held for more than 12 months, the gain is treated as long-term and taxed under Section 112A at 12.5%, with a tax exemption of up to Rs. 1,25,000 available for long-term capital gains on listed equity shares.

Comparative Analysis
The following computation illustrates the tax implications for different investors under both scenarios: shares tendered in the buy-back vs. retained and sold later in the market.

Conclusion
The computation points out how the tax impact of a buy-back varies depending on the holding period of the shares. Following the 2024 amendment, the entire amount received in a buy-back is treated as a deemed dividend and taxed at a higher rate of 30%, while only a notional capital loss is recognised. In contrast, when shares are sold in the open market, the gains are taxed as capital gains at lower rates of 12.5% or 20% depending on the holding period, with an exemption of up to Rs. 1.25 lakh for long-term gains.

Overall, the analysis shows that the post-tax outcomes vary significantly in both cases, whether shares are tendered in the buy-back or sold in the market. The actual tax impact for each investor will hinge on factors like the duration of holding, acquisition cost, applicable tax rate, and liquidity preference. Here we are trying to provide a comparative understanding of the tax implications and not suggesting any particular course of action.

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