The way corporations reward their shareholders has seen a substantial transformation in the Indian stock market in recent years. These days, repurchasing shares is preferred above paying out dividends.
Buybacks have emerged as a tax-efficient option for shareholders in the highest tax bracket to optimize their post-tax earnings, and this shift is driven by a clear economic advantage. “From large-cap giants to small and mid-cap players, buybacks are becoming prominent, and even promoters are seen to leverage this strategy without facing backlash from the market.”
The investment landscape has significantly changed as a result of the Indian tax legislation, especially for high-income shareholders. The main distinction is in how buybacks and dividends are treated tax-wise. A company’s distributed income is subject to a flat tax rate of 23.296% when it undertakes a repurchase. Conversely, owners who receive dividends are subject to a 37% tax rate (surcharges excluded). For individuals in the highest tax rate, buybacks are an appealing alternative due to the significant tax discrepancy.
A corporation that chooses to repurchase rather than pay out dividends will have an almost 45% higher post-tax realization for investors in high tax brackets. Buyback activity has increased as a result of this financial incentive as businesses strive to maintain the satisfaction of their high-earning shareholders.
Large-cap corporations aren’t the only businesses embracing the buyback trend; small and mid-cap firms are also embracing this tax-saving tactic. Due to their limited resources, smaller companies used to be reluctant to engage in buybacks, but these days they see buybacks as a good way to reward shareholders and reduce their tax liability.
According to data, buybacks are becoming a more popular financial tool for small and mid-cap corporations looking to increase shareholder value. There are two causes for this trend:
1. Regardless of the market capitalization of the company, the first reason it appeals to shareholders in the highest tax bracket is the tax benefits.
2. Second, optimizing capital allocation is a smart strategic decision for businesses, especially when they have extra cash on hand.
The repurchase corporation is subject to a flat tax rate of 23.296% [20% of dispersed income plus a 12% surcharge and a 4% health and education cess] in addition to other taxes. If you are a person and your income tax bracket is lower than this rate, you will benefit more from dividends.
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