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Maximizing Returns: Buybacks vs. Dividends in the Indian Stock Market

In a notable shift within the Indian stock market, companies are increasingly favoring share buybacks over traditional dividends as a means of rewarding shareholders. Rahul Bhutoria, Director and Founder of Valtrust, attributes this trend to the tax efficiency offered by buybacks, particularly for shareholders in the highest tax bracket.

Tax Advantage of Buybacks: A Game-Changer

The transformation in shareholder rewards is driven by a significant tax advantage inherent in buybacks. Under the Indian tax code, companies conducting buybacks are subject to a flat rate of 23.296% tax on the distributed income. In contrast, shareholders receiving dividends face a higher tax rate of 37%, excluding surcharges. This tax differential is substantial and positions buybacks as an attractive option, especially for those in the highest tax bracket.

Post-Tax Realization: A Key Metric

For individuals in the higher tax bracket, the post-tax realization through buybacks is nearly 45% higher compared to receiving dividends. This financial incentive has led to a notable surge in buyback activities, with companies strategically opting for this approach to appease their high-earning shareholders.

A Strategic Move: Companies Embrace Buybacks

From large-cap giants to small and mid-cap players, companies, and even promoters, are increasingly leveraging the strategy of buybacks without facing market backlash. The tax efficiency associated with buybacks has become a pivotal factor influencing companies’ decisions as they aim to keep their high-earning shareholders content.

In conclusion, the prevailing tax differentials have positioned buybacks as a more tax-efficient mechanism for maximizing post-tax returns, making it a preferred choice for companies navigating the evolving landscape of shareholder rewards in the Indian stock market.


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