Share buybacks can increase earnings per share and companies will look lean, but for most Indian investors, they are a lost proposal, warning Capital Mind founder Deepak Shenoy. “For a taxable person, buyback is not useful for tender in India,” Shenoy wrote in a social media post on Saturday, how taxes are stacked against shareholders.

“The full amount of the buyback is taxed as a dividend. Shares tendered in buyback are supposed to be sold for zero rupees,” Shenoy said. Investors who bought shares for 1000 rupees and tend to them for 2,000 rupees, pay taxes on a person’s slab rate, which can be 35% or more.

Meanwhile, Rs. 1000 purchase costs are considered as capital loss. “For capital gains, long -term taxes are 12.5%, and you can only offset long -term loss against long -term benefits, so it is only 15% of the benefit (after the surcharge on tax) at 1,000 = Rs.150,” Shenoy said.

By calculating, the tender investor in such a buyback will get Rs. 1,450 leaves with net tax. On the contrary, selling the same shares in the market at 1,700 will get Rs 1,595 after tax.

Optional, but still unnatural

Buybacks are not mandatory in India. “There is a tender window (which can come after months), and if you don’t tender, you just don’t buy your stock back,” Shenoy wrote. For investors who need liquidity, he argued that selling in the market usually gives good results after taxes.

Companies still like them

Shenoy pointed out that the rules were not always this harsh. “Buyback tax rules have become very terrible, as you have seen. It was that the tax was not imposed on your name – the companies just paid 20% tax. This changed to the new system in 2024.”

However, he said, “Buybacks are great for companies.” Unlike dividends, whatever the full tax is imposed, the buyback is shrinking the share base, strengthening future earnings per share. “So it’s better to buy a buyback than to dividend.”

Who wins in this system?

Everyone loses. “Lower tax slabs and some Indian institutions who do not pay taxes like insurance companies, pension funds, EPFOs and mutual funds,” Shenoy said.

His advice for retail investors was frank: “Calculate the actual return on your investment before you decide to tender the share in the buyback. Unless you are in low tax brackets, it is usually better to sell many shares in the market.”

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