Taxation on Buyback after Bonus Issue

Say I have 14 shares @2250 for more than a year and got 7 shares as bonus (after 365 days since last buy date), post which the avg price went @1500.

Consider, the stock is now trading @1250.

The company announces buyback @1750.

Though buybacks are not taxable at the investors side , I just wanted some clarity.

So if I tender and say 5 shares gets accepted, from taxation perspective (and checking whether tendering makes sense), will it be a loss (1750 - 2250= -500) or will it be a profit (1750 - 1500 = 250)?

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It will be 1750 - 2250 as taxation is on FIFO method.

Hi @LearnerBee

Yes, as rightly said, buyback is not taxable to the shareholder.

Also, FIFO method is considered for the computation of capital gains on the sale of shares. So, it shall be a loss, ie, 1750-2250).
You can read more about Section 115QA - Tax on Buyback of Shares - Learn by Quicko.

Thanks @neha1101 and @Quicko.

As profits in buyback are not taxable for investors, can the loss be shown to set off ?

Hi @LearnerBee

Since the capital gain from the buyback is not liable to tax, any loss incurred from the buyback is also not available for set-off/carry-forward purposes.

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Thanks @Quicko for confirming.

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So in such cases, the best course of action to minimize taxation and benefit from no taxation on buyback would be to

  • Sell the shares bought pre bonus in open market thus booking capital loss
  • Let the bonus shares (with cost of acquisition as 0) be taken for buyback - reducing future tax burden of bonus shares
  • Buy the shares sold in first step from open market

Is this idea correct ?

Hello @Abhinav_Gupta2,

Yes, you can execute the transaction in order to minimize your tax burden only if there is a capital loss against the pre bonus shares held by you as gains on buyback of shares is exempt from taxation.

Hope this helps!