Union finance minister Nirmala Sitharaman on Tuesday plugged another loophole when she announced that income received by shareholders from share buyback will be taxable in their hands.

Earlier, buybacks were taxable in the hands of the company at 20 per cent. Now, proceeds received by shareholders from such repurchase will be treated as dividend and taxed as per his or her income tax slab.

The cost of shares surrendered by the investor during the buyback process will be treated as a capital loss and can be carried forward for eight years and can be set off against other capital gain income.

Observers feel that the move could deter some shareholders from tendering shares in a buyback, but on the other side improve the cash reserves of the company. For the shareholder, the announcement means shelling more money to the government apart from dividend income which are already taxed.

According to Vipul Bhowar of Waterfield Advisors, for investors, taxation on share buybacks could potentially dampen enthusiasm, as the income will now be taxed at the same rate as dividends.

``The elimination of the buyback tax will increase corporate cash flow, but the new taxation of buyback income as dividends may decrease interest in share repurchase programmes, particularly among cash-rich firms. In the future, companies might favour dividends over buybacks,’’ he said.