What is more tax-efficient for shareholders – Buyback or Dividends?
The Indian stock market has witnessed a significant shift in recent years in the way companies reward their shareholders. Share buybacks are now becoming the preferred choice over traditional dividends, according to Rahul Bhutoria, Director and Founder of Valtrust, a company providing asset management solutions to families, institutions and individuals.
He says this transformation is driven by a clear economic advantage: buybacks have emerged as a tax-efficient way for shareholders in the highest tax bracket to maximize their post-tax returns. “Buybacks are becoming prominent from large-cap giants to small and mid-cap players and even promoters are seen to leveraging this strategy without facing market backlash.”
In an email interaction with FE Money, Rahul Bhutoria sheds more light on the growing trend and what is more tax-efficient for shareholders. Edited excerpts:
The Indian tax code has played a pivotal role in reshaping the investment landscape, particularly for high-income shareholders. The fundamental difference lies in the tax treatment of buybacks versus dividends. When a company conducts a buyback, it is subject to a flat rate of 23.296% tax on the distributed income. In contrast, shareholders receiving dividends face a 37% tax rate, excluding surcharges. This tax differential is substantial and makes buybacks an attractive option for those in the highest tax bracket.
The post-tax realization for high-tax bracket investors is nearly 45% higher when a company opts for a buyback rather than distributing dividends. This financial incentive has led to a surge in buyback activity, as companies aim to keep their high-earning shareholder’s content.
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