A buyback is announced at ₹560 on a share trading at ₹460. You hold 500 of them, bought at ₹380. An earlier lesson in this track worked out the part that used to be the whole of the analysis: the premium applies only to the shares actually accepted, so the acceptance ratio decides what the exercise is worth. That arithmetic has not changed. What has changed is the head of income the money arrives under. For buybacks from the first of October 2024, the amount you receive is treated as a dividend in your hands rather than as the proceeds of a sale — and for a holder in the higher slabs that single reclassification can turn a premium of a fifth into an outcome worse than simply selling in the market.
Your employer wants to put ₹50,000 in your hands. Paid as reimbursement of an expense you actually incurred and documented, the whole of it reaches you. Paid as a bonus through the payslip, it goes through the salary computation and tax comes off the top, and a good deal less arrives. The employer's cost is identical in both cases. What reaches you depends entirely on which head it was paid under — and the head is not something either of you chooses, it is decided by what the payment actually is.
A buyback pays you for shares. Until October 2024 the tax system treated the receipt as exempt in your hands and taxed the company instead. It now treats the whole receipt as a dividend paid to you, taxable at your own rate, with the cost of the shares handled separately as a capital loss. The company's cheque is the same size as it was. What you keep is not, and it now depends on who you are.
How a tender actually works
- 1A record date fixes who is eligible
Only shareholders on the register on the record date may tender. Buying the share after the record date buys the share without the entitlement, which is a distinction the price generally reflects and beginners generally do not.
- 2An entitlement ratio is published
The offer states how many shares you are entitled to tender for every so many held — the entitlement ratio. You may tender more than your entitlement, and shares tendered beyond it are considered only after entitled tenders across the category have been dealt with. This is separate from the acceptance ratio, which is the proportion actually bought at the end.
- 3The small-shareholder category is assessed separately
A portion of the offer is reserved for small shareholders, defined by the value of the holding on the record date. The two categories are scaled independently, which is why acceptance in the reserved category is routinely far higher — and why the same buyback produces two quite different outcomes for two holders of the same company.
- 4Bids go in through your broker, into an exchange window
Tenders are not placed on the company or its registrar. They go through your broker into a separate acquisition window the exchange operates for the purpose, on defined dates, and they settle through the clearing corporation like any other exchange transaction.
- 5The shares are blocked while tendered
Tendered shares are earmarked in your demat account through the depository so that they cannot also be sold in the market. Accepted shares are transferred and paid for; unaccepted shares are released back. The block is the part with a practical consequence, and it is set out immediately below.
What the money is treated as
| Buybacks before 1 October 2024 | Buybacks from 1 October 2024 | |
|---|---|---|
| Who paid the tax | The company, through a distribution tax on the amount distributed | You, in your own return |
| What is taxed | Nothing in your hands — the receipt was exempt for the shareholder | The whole amount received, treated as a dividend. Not the gain — the entire sum |
| At what rate | A single rate applied at the company level, identical for every shareholder | Your own slab rate, as with any other dividend. Two holders of the same shares in the same buyback now pay different amounts |
| What happens to your cost | It was absorbed in the exempt receipt and produced nothing | It is not deducted from the amount received. It becomes a capital loss, available against capital gains under the ordinary set-off and carry-forward rules |
| What appears on the way in | The full amount, with nothing withheld | Tax deducted at source on the dividend above the prescribed threshold, as on any dividend, and credited against your liability |
Putting a number on it
- The whole receipt is taxed at about 31%, so nearly a third of the ₹560 goes before anything else is considered
- The capital loss is useful only if there are capital gains — and long-term losses can meet only long-term gains
- The premium has to be large before tendering beats an ordinary sale, and a fifth was not large enough in the example above
- The higher the premium and the higher the acceptance, the better it gets — but it starts from a long way behind
- The dividend falls in a low or nil slab, so most or all of the ₹560 survives
- Tax deducted at source can still be withheld on the way in, and is recovered by filing a return — which means filing, not assuming
- The capital loss is usually worth nothing, because there are no gains to put it against, but it costs nothing either
- On the same numbers as the worked example, tendering is comfortably ahead of a market sale rather than behind it
For a buyback after 1 October 2024, a resident shareholder tenders 200 shares that cost ₹300 each and all 200 are accepted at ₹500. How is this treated in the shareholder's hands?
Module checkpoint: when the company changes hands
5 questions. Answers are revealed once you submit all of them.
1.An acquirer buys 30% of a company from its promoter and makes the mandatory open offer for 26% of the shares. Public shareholders — who between them hold the other 70% — tender shares equal to 52% of the company. You tendered 1,000 shares. How many are accepted?
2.Two companies merge under a scheme sanctioned by the tribunal, and you end up holding shares in a company you never bought. Why did no open offer come to you?
3.You hold 800 shares of a company and consider the exchange ratio in a proposed merger to be unfair. What can you actually do?
4.A company with 5 crore shares trading at ₹300 issues 1 crore new shares at ₹240 to a single investor. Taking the market price as a stand-in for value, what has happened?
5.Why can a buyback at a fifth above the market price now be worse for a top-slab shareholder than simply selling the same shares in the market?
500 share ₹380 ke, market ₹460, buyback ₹560. Acceptance 20% → 100 share ₹560 pe = ₹56,000, 400 wapas. Pehle yeh paisa aapke haath mein tax-free aata tha, tax company deti thi. 1 October 2024 se poora ₹56,000 "dividend" mana jaata hai aur aapke slab pe tax lagta hai — 30% + cess = 31.2% → ₹17,472 tax, haath mein ₹38,528. Aur cost? Woh is paise se minus nahi hota: ₹38,000 alag se capital loss ban jaata hai, jo sirf capital gain ke saamne chalega (long-term loss sirf long-term gain ke saamne), aur gain hi nahi hai toh kuch bhi nahi. Maan lo gain hai — 12.5% pe woh loss ₹4,750 ka kaam karta hai → kul ₹43,278. Doosra raasta: wahi 100 share market mein ₹460 pe bech do = ₹46,000, gain ₹8,000, 12.5% pe ₹1,000 tax → ₹45,000. Matlab ₹560 ka buyback, ₹460 ke market se kareeb ₹1,700 kharaab — 22% premium ke baawajood. Barabari ke liye buyback ₹585 chahiye tha, yaani 27%. Par yeh sirf top slab wale ka hisaab hai. Jinki income kam ya nil hai, unke liye ₹56,000 lagbhag poora bachta hai aur tender saaf jeet jaata hai — TDS kat sakta hai, return bhar ke wapas milta hai. Isliye ab yeh hisaab aapki apni tax rate ke bina nahi banta, aur announcement dekh kar jawab nahi nikalta. (Rate misaal ke liye; brokerage aur charges chhode gaye hain.)
- A record date fixes eligibility, an entitlement ratio says how much you may tender, and the reserved small-shareholder category is scaled separately.
- Tenders go through your broker into an exchange acquisition window, and the shares are blocked for the duration of it.
- From 1 October 2024 the whole amount received is treated as a dividend and taxed at your own slab rate.
- The cost is not deducted from the receipt — it becomes a capital loss, useful only against capital gains and only if you have them.
- The comparison against an ordinary market sale now depends on your own tax rate, so the same offer is a different answer for different holders.
Mark it done to track your progress through the curriculum.