New Delhi, Nov. 12 -- Share buybacks, once a preferred way for Indian companies to reward investors, are set to lose their shine.

From October 2024, under India's Finance (No. 2) Act, 2024, the entire payout from a buyback will be taxed in shareholders' hands as a deemed dividend, marking a sharp break from the earlier system where companies paid a buyback tax and investors received proceeds tax-free.

The idea is to create parity between dividends and buybacks, since both return surplus cash. But the new approach may have unintended consequences-from higher tax bills to reduced flexibility for companies and investors alike.

Under the new rule, the entire buyback amount-not just the profit over cost-is taxed at the shareholder's margina...