Section 10(34) of the Income Tax Act, 1961, provides an exemption from tax for income received by a shareholder from a company on account of buyback of shares. In this blog, we will discuss the provisions of section 10(34) in detail.
Introduction
Section 10(34) was introduced by the Finance Act, 2013, and came into effect from 1st April 2014. The section provides relief to shareholders who receive income from a company on account of buyback of shares.
Exemption from Tax
According to section 10(34), any income received by a shareholder from a company on account of buyback of shares will be exempt from tax. This exemption applies to all types of shares, whether equity or preference, and to both listed and unlisted companies.
Conditions for claiming exemption
To claim the exemption under section 10(34), the following conditions must be fulfilled:
- The buyback of shares must be undertaken by the company after 1st June 2013.
- The buyback must be approved by the Board of Directors of the company.
- The buyback must be in accordance with the provisions of the Companies Act, 2013.
- The tax on distributed income under section 115QA must have been paid by the company.
In case these conditions are not fulfilled, the income received by the shareholder will be taxed as per the applicable provisions of the Income Tax Act.
Tax on buyback by the company
The company is required to pay tax on the distributed income under section 115QA of the Income Tax Act. The tax is levied at the rate of 20% plus surcharge and cess, and is payable within 14 days from the date of buyback.
Impact on shareholders
The exemption under section 10(34) is beneficial for shareholders as it provides relief from tax on the income received on account of buyback of shares. Shareholders can also benefit from the increase in share prices due to the reduction in the number of outstanding shares after the buyback.
While the exemption under section 10(34) is beneficial for shareholders, it is important to note that it only applies to income received on account of buyback of shares. Any other income received by the shareholder from the company will be taxed as per the applicable provisions of the Income Tax Act.
It is also important to note that the exemption under section 10(34) is not applicable to shares held by a non-resident shareholder. Non-resident shareholders are subject to tax on their capital gains as per the provisions of the Income Tax Act and the applicable Double Taxation Avoidance Agreement.
Another important point to keep in mind is that the exemption under section 10(34) is not applicable to buybacks undertaken by a company in the course of its liquidation. In such cases, the shareholders will be taxed on the income received as per the applicable provisions of the Income Tax Act.
One of the key benefits of the exemption under section 10(34) is that it can encourage companies to undertake buybacks, which can be a useful tool for capital management. By buying back shares, companies can reduce their outstanding share capital, which can increase the earnings per share and return on equity. This can lead to an increase in share prices and can benefit the shareholders who hold onto their shares.
However, it is important for companies to ensure that the buyback is undertaken in a responsible manner and does not negatively impact the financial health of the company. Companies must ensure that they have sufficient reserves to undertake the buyback, and that it does not affect their ability to meet their operational and financial obligations.
The exemption under section 10(34) can also be beneficial for investors who hold shares in multiple companies. By undertaking buybacks, companies can return excess capital to shareholders, which can be reinvested in other companies or in other investment vehicles. This can help investors to diversify their portfolios and manage their risk exposure.
It is worth noting that the exemption under section 10(34) is subject to change with changes in the tax laws or government policies. Investors and companies must stay informed about any changes in the tax laws that could impact their tax liabilities and obligations.
Conclusion
Section 10(34) of the Income Tax Act, 1961, provides an exemption from tax for income received by a shareholder from a company on account of buyback of shares. This exemption applies to all types of shares, whether equity or preference, and to both listed and unlisted companies. However, certain conditions must be fulfilled to claim the exemption. The tax on distributed income under section 115QA must have been paid by the company.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
What is section 10(34) of the Income Tax Act, 1961?
Section 10(34) provides an exemption from tax for income received by a shareholder from a company on account of buyback of shares.
When did section 10(34) come into effect?
Section 10(34) came into effect from 1st April 2014.
What types of shares are covered under section 10(34)?
The exemption under section 10(34) applies to all types of shares, whether equity or preference, and to both listed and unlisted companies.
What are the conditions for claiming the exemption under section 10(34)?
To claim the exemption under section 10(34), the buyback must be approved by the Board of Directors of the company, in accordance with the provisions of the Companies Act, 2013. Additionally, the tax on distributed income under section 115QA must have been paid by the company.
Is the exemption under section 10(34) applicable to non-resident shareholders?
No, the exemption under section 10(34) is not applicable to shares held by non-resident shareholders.
Is the exemption under section 10(34) applicable to buybacks undertaken in the course of liquidation?
No, the exemption under section 10(34) is not applicable to buybacks undertaken by a company in the course of its liquidation.
What is the tax rate applicable under section 115QA?
The tax rate applicable under section 115QA is 20% plus surcharge and cess.
When is the tax under section 115QA payable?
The tax under section 115QA is payable within 14 days from the date of buyback.
How can shareholders claim the exemption under section 10(34)?
Shareholders do not need to claim the exemption under section 10(34) separately. The exemption will be automatically applied to the income received on account of buyback of shares.
What are the benefits of the exemption under section 10(34)?
The exemption under section 10(34) provides relief from tax on the income received on account of buyback of shares. This can encourage companies to undertake buybacks as a capital management tool, which can benefit both the companies and the shareholders.
