Infosys’ announcement of a massive ₹18,000 crore share buyback initially excited investors, positioning it as one of the largest repurchase programs by an Indian IT company. The Bengaluru-based tech major proposed to repurchase up to 10 crore shares at ₹1,800 per share, a premium of nearly 20 percent over the market price. However, a major tax rule change effective from October 2024 appears to have taken much of the shine off the buyback — particularly for its promoters and top shareholders.
The Buyback and Promoter Decision
Infosys opted for the tender offer route for its buyback, allowing shareholders to sell their shares back to the company at a fixed premium price. Such buybacks typically boost earnings per share and return surplus cash to investors. But what drew attention was the decision of Infosys’ promoters — including founders and senior early investors — to opt out of the buyback entirely.
At first glance, their abstention was seen as a gesture of confidence, signaling long-term faith in the company’s growth prospects. However, tax experts and financial analysts quickly pointed out that recent changes in the taxation structure for buybacks made participation less financially attractive for high-income shareholders, including promoters.
The Tax Change That Altered Everything
Until September 2024, companies undertaking a buyback were liable to pay a buyback tax of 20 percent (plus applicable surcharges), while shareholders received the amount tax-free. This structure made buybacks more tax-efficient compared to dividend payouts or regular share sales.
However, from October 1, 2024, the government implemented a significant change under the Finance Act, 2024. Now, the entire buyback amount received by the shareholder is treated as dividend income, taxable at the shareholder’s own slab rate. This means:
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The company no longer pays a buyback tax — instead, the shareholder must pay personal income tax on the proceeds.
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The cost of acquisition (price originally paid for the shares) cannot be deducted. It can only be treated as a capital loss to be set off against future capital gains, not against the buyback income.
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For individuals in the highest tax bracket, this can mean an effective tax rate of around 35 percent on the total amount received.
In simple terms, shareholders now pay income tax on the full ₹1,800 received per share — not merely on the profit portion over their purchase cost.
Why Promoters Opted Out
Infosys’ promoters — including co-founders who have held shares since the company’s early years — have extremely low acquisition costs for their holdings. Under the earlier regime, they would have enjoyed a favorable tax treatment, with only capital gains taxed. The new rule, however, treats the entire buyback payout as income, making it significantly less lucrative.
For example, under the previous system, a promoter tendering shares could have retained nearly ₹1,400–₹1,500 per share post-tax, depending on circumstances. Under the new rules, their post-tax amount might fall to around ₹1,150–₹1,200, nearly eliminating the buyback premium advantage.
The math, therefore, simply didn’t add up. By abstaining, the promoters avoided a higher tax liability while maintaining their percentage stake in the company — which naturally increases when other shareholders tender their shares.
Broader Implications of the Rule Change
This buyback marks the first major test of the revised taxation framework, and Infosys’ case highlights how policy shifts can alter corporate capital-return decisions. The new structure effectively makes buybacks less attractive to high-net-worth individuals and promoters, while possibly favoring smaller investors in lower tax brackets.
For retail investors, the buyback could still be beneficial. Many are in lower income brackets and will face a smaller effective tax burden. Additionally, mutual funds and institutional investors — depending on their specific tax structures — may still find it worthwhile to participate.
However, the broader market implication is that India Inc. may see fewer large-scale buybacks in the near term. Companies might instead opt for dividend payouts or open-market repurchases, where taxation is more straightforward or can be optimized based on timing and holding patterns.
Market Reaction
Following the buyback announcement, Infosys shares saw a short-lived uptick before stabilizing. Analysts noted that while the buyback underscored the company’s robust cash reserves and commitment to shareholder returns, the changed tax environment reduced its attractiveness.
The fact that promoters — often seen as the company’s most informed insiders — chose not to participate may have sent a mixed signal. While their abstention can be read as confidence in the company’s long-term value, it also underscores how India’s taxation policy can influence corporate and investor behavior more than market logic.
Changing Strategies for Cash Distribution
This development may force companies to rethink how they return cash to shareholders. Until now, Indian corporations had increasingly favored buybacks over dividends because they offered greater flexibility and tax efficiency. But the Finance Act 2024 has upended that advantage.
Industry observers expect a shift back toward dividends or open-market share purchases, where taxation can be managed at the shareholder level more effectively. Some experts also suggest companies might delay or stagger buybacks to evaluate the new tax implications more carefully.
A Signal Beyond Tax
While tax considerations are key, Infosys’ promoters not participating in the buyback also has a symbolic layer. Their decision can be interpreted as a statement of belief in the company’s intrinsic value — indicating they consider ₹1,800 per share as undervaluing the firm’s long-term potential.
Infosys continues to hold a dominant position among India’s IT exporters, boasting strong cash flows, a healthy balance sheet, and a reputation for governance transparency. For long-term investors, promoter confidence — even amid adverse tax conditions — may reinforce trust in the company’s future trajectory.
What Lies Ahead
As India’s taxation rules continue to evolve, the Infosys episode could set a precedent. Large, promoter-heavy companies contemplating buybacks may need to weigh tax efficiency against signaling effects and investor sentiment.
Key questions for the months ahead include:
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Whether the government will revisit the buyback taxation framework to address investor concerns.
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How other IT majors — like TCS, HCLTech, and Wipro — will structure future cash-return strategies.
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Whether institutional investors will continue viewing buybacks as a viable exit or value-enhancement opportunity under the new rules.
The Infosys buyback remains a strong testament to the company’s financial discipline and willingness to return capital to shareholders. However, the new tax framework undeniably diminished the allure for promoters, who saw their potential post-tax returns eroded.
In essence, what was once a tax-efficient, shareholder-friendly move has now become a more complex and less rewarding exercise for large investors. The “tax twist” has certainly dulled the shine of Infosys’ ₹18,000 crore buyback for its promoters — and it may well reshape how India’s corporate giants think about rewarding their shareholders in the years to come.
