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There is a very important news for common investors and listed companies betting in the Indian Stock Market. There is going to be a big and revolutionary change in the rules of share buyback from 1st August. These new rules being implemented by market regulator SEBI and the government are going to have a direct impact on the profits of investors and the buyback strategy of companies. If you also do trading or long term investment in the stock market, then it is very important for your portfolio to understand this change closely.

What is share buyback and why is its system changing?

When a listed company buys back its shares from its own existing shareholders, it is called share buyback. Companies often do this to increase the value of their shares or to reward investors. Till now, companies themselves paid tax on buyback, due to which the amount received by investors was completely tax-free. But under the new rules to be implemented from August 1, this entire taxation system is being changed to make it more transparent and rational, due to which the entire structure of this big corporate action of the stock market will change.

What will change from August 1: New tax mathematics for investors

After the implementation of the new rule, now the earnings from share buyback will be completely treated like ‘dividend’. This means that if a company brings a buyback after August 1, then the additional amount received will be directly taxed as per the tax slab of the investor. For example, if you fall in the 30 per cent tax slab, you will have to pay 30 per cent tax on the profits made from buyback. This change will especially affect large and retail investors who earned tax-free profits through buybacks.

This will have a big impact on the buyback plans of companies

The impact of this new rule will be visible not only on investors but also on the thinking of companies. Till now, companies used to give priority to buyback instead of giving dividend because the tax burden was less in this. But now due to the same tax rules being applicable on both, companies will think twice before bringing share buyback. Market analysts believe that after this change, there may be a slight decrease in the number of buybacks by companies in the stock market in the coming days or companies will prepare new strategies for this.

What strategy should small and retail investors adopt now?

In view of this change in rules, market experts have advised retail investors to be cautious. Now do not blindly invest in the buyback offer of any company just by looking at the premium (higher price). Before investing, be sure to calculate your personal tax slab, because after deducting tax, your actual profit may be less than expected. This new rule is completely transparent and encourages long-term investors to stick to companies with strong fundamentals.