Buybacks vs Dividends — and the 2024 Twist That Changed the Math

What a buyback actually is

A buyback (or share repurchase) is when a company uses its own spare cash to buy back some of its shares from existing shareholders — and then cancels them. Picture a pizza cut into eight slices. Remove two slices and throw them away, and each remaining slice is now a bigger share of the same pizza. Fewer shares exist, so every surviving share represents a slightly larger claim on the company's profits. That's why a buyback can nudge up earnings per share — profit spread across fewer shares — even when the actual profit hasn't moved at all.

Buyback vs dividend — same goal, two routes

Both are ways of handing surplus cash back to the owners of a company. A dividend is a direct payout: every shareholder gets a fixed amount per share, automatically, whether they asked for it or not. A buyback is opt-in: the company offers to buy a limited number of shares — usually at a price above the current market price — and you choose whether to sell yours.

So a dividend rewards everyone equally and signals steady, recurring cash. A buyback is usually a one-off, shrinks the share count, and is the company's way of saying its own stock is cheap enough to be worth buying. In India almost all buybacks now run through the tender route — a short, fixed window where you submit ("tender") your shares at the announced price — because the older open-market method has been phased out.

The 2024 twist: buybacks were once a tax freebie

Here's the part most people miss. Until 30 September 2024, money you received in a buyback was completely tax-free in your hands. The company paid a flat buyback tax (around 20%) before handing over the cash, so the cheque reached you clean. Dividends, by contrast, were taxed at your normal income-tax slab. For cash-rich companies, that made buybacks the tax-smart way to return money.

From 1 October 2024, the rule flipped. Buyback proceeds are now treated as a deemed dividend and taxed in your hands at your slab rate — exactly like a dividend. (The cost of the shares you tendered becomes a capital loss you can set off against other gains.) Overnight, the headline tax advantage of buybacks disappeared.

A real example: TCS and the great buyback rush

TCS is the poster child for buybacks. In its 2023 buyback the company offered to repurchase shares at ₹4,150 each — a premium to the market price — for a total of up to ₹17,000 crore, through the tender route. For years TCS leaned on buybacks partly because they were so tax-efficient for shareholders.

Then came the 2024 rule change — and India Inc. saw it coming. In the weeks after the July 2024 Budget proposed the switch, companies scrambled to launch buybacks before the 1 October deadline, so their shareholders could still pocket the cash tax-free. Indus Towers and Welspun Living were among those that rushed buybacks through in August 2024. The lesson: a buyback and a dividend can look like very different things — but after October 2024 the taxman treats your buyback cheque exactly like a dividend. The free lunch is gone.