The new month is bringing bad news for people who earn money by investing in the stock market. Actually, there is going to be a big change in the rules of taxation related to shares from the first date. This change is going to be heavy on the shareholders. Now there is going to be higher tax on their earnings. This change is related to share buyback i.e. repurchase of shares. Let us know what this change is and how it is going to affect the stock market investors.
Changes were proposed in the budget
Finance Minister Nirmala Sitharaman, while presenting the full budget for the financial year 2024-25 in July, had proposed changes in the tax rules on share buyback. The proposal is now going to become a rule from October 1, 2024. Till now, the holder was not liable to tax on the income earned from repurchase of shares. Taxation rules on share buyback were applicable to companies, but they were exempted from it.
Taxed like dividend, not capital gain.
Now the tax liability on the income from share buyback is being shifted from corporations i.e. companies to shareholders. This means that whatever income is earned in this way, the shareholder will have to pay tax on it. The income from share buyback will be classified as dividend and not capital gain. That is, just as income tax is payable on dividend earnings, the same tax rules will now apply on buyback earnings also.
The income from dividend is added to the total income of the taxpayers. After that, the income tax liability is calculated according to the slab of the income. Now similarly, buyback earnings will also be added to the total income of tax paying shareholders. After that, income tax liability will be calculated according to the respective slab.
Share investors earn in many ways
Those who invest in the stock market earn in many ways. The first income comes from increasing share prices. Suppose you buy a share worth Rs 100. After some time its price increases to Rs 1000. In this way you earn Rs 900 from that share. Apart from price rise, shareholders also get other earnings. Many companies pay dividends to their shareholders.
Tax will be calculated in this way
Similarly, companies come up with share buyback offers. In buyback the company buys back its public shares. In such offers, companies usually offer a price above the current price (CMP) of the shares. For example, the share has just increased to Rs 1000. The company can make Rs 1,100 in buyback. In this way you get an additional income of Rs 100, which is different from the income of Rs 900 due to increase in prices. Now in such a case, the earning of Rs 900 will be taxed as capital gain, but the later earning of Rs 100 from buyback will be taxed as dividend.
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