Dividend or buyback: two ways a company hands back cash

A "what if" for FY27. The board has a slide with one number on it: ₹15 crore. The kiosks are built, there's still cash in the bank, and two directors want some of it returned to shareholders.

The two plans on one page

Both plans start from the 31 March 2026 balance sheet: 5 crore shares, ₹110 crore of net worth, ₹55 crore of cash and ₹9 crore of yearly profit. For a fair comparison, we keep that profit the same afterwards. (Sameer Chai books no income on its cash, so spending ₹15 crore of it doesn't dent profit. At most companies it would, a little, and equally under both plans.)

Some rows are identical. Net worth falls by ₹15 crore either way, and the cash is gone either way. The differences are in who ends up holding what.

Who actually gets the cash

Take Riya's mum and her 200 shares.

• Plan A: 200 × ₹3 = ₹600, paid into her bank whether she asked for it or not.
• Plan B: she can offer shares, or ignore the offer. In the simplest case, where every holder tenders and the company takes the same share from each, it buys 25 lakh of 5 crore shares: 1 in 20. That's 10 of her 200 at ₹60, so ₹600, and she keeps 190 shares. Small shareholders have their own reserved slice of the offer, so in a real buyback her ratio usually comes out different.

The same ₹600 in both cases, in that simple version. In Plan A she keeps all 200 shares and gets cash. In Plan B she swaps 10 of them for cash at ₹60, above the ₹54 the market was paying. If she does nothing, Plan A still pays her. Plan B doesn't.

What happens to shares and EPS

A dividend doesn't touch the share count. A buyback cancels the shares it buys, so the same profit is split among fewer of them.

The dividend plan has its own number to watch. ₹15 crore against ₹9 crore of profit is a payout ratio of about 167%. The company would be paying out more than a whole year's profit, partly from profits it kept in earlier years. Our normal payout is about 28%. A one-off like this tells you nothing about what next year's dividend will be.

The same goes for the yield. ₹3 against a ₹54 price is about 5.6%, six times our usual 0.93%. Websites that work out yield from the last twelve months of dividends will show that figure for a year, then it drops away. A high yield built on one special payment isn't a yield you can expect again.

How each one is taxed, after Budget 2026

The rule changed on 1 April 2026

The dividend. The company pays no tax on paying it out. Each shareholder adds it to their income and pays tax at their own slab rate. Under the Income-tax Act, 2025, the company deducts 10% TDS (Section 393) once a person's dividends from it pass ₹10,000 in a tax year. Riya's mum's ₹600 is well under that, so nothing is deducted, but it still goes in her return. Sameer's ₹9 crore is taxed at his top slab.

The buyback. This is where the law has swung about.

• From 1 October 2024 to 31 March 2026, the whole buyback price was taxed as a dividend in the seller's hands, and the cost of the shares counted as a separate capital loss.
• The Finance Act, 2026 removed buybacks from the meaning of dividend in the Income-tax Act, 2025, from 1 April 2026. Now the seller pays capital gains tax on the gain: ₹60 minus what the share cost. For listed shares, long-term gains above ₹1.25 lakh a year are taxed at 12.5%, and short-term gains at 20%.
• Promoters pay extra. Under the new Section 69(2), a promoter who sells into a buyback pays an additional tax on top: 10% on short-term and 17.5% on long-term gains for an individual like Sameer, or 2% and 9.5% for a promoter that is a company. Either way, an individual promoter's rate comes to 30%, before surcharge and cess.

So in Plan B, Riya's mum pays capital gains tax only on the gain on the shares she sells. A small long-term gain may sit inside her ₹1.25 lakh yearly exemption. Shareholders who don't sell pay nothing. If Sameer did tender, his gains would be taxed at about 30%, close to his slab rate on a dividend. That extra tax was written to stop promoters using buybacks as a cheaper door for their own cash.

Where the money may come from

A difference most comparisons miss

The two plans don't even draw on the same pot.

A dividend can only come out of profits: this year's, or past years' profits kept in the business. Sameer Chai's ₹60 crore of reserves on 31 March 2026 were ₹45 crore of IPO premium and ₹15 crore of kept profits, and ₹2.5 crore of those profits has since gone out as the FY26 dividend. The IPO premium can't pay a dividend at all. And when a year's profit isn't enough, the Companies Act sets conditions before a company can dip into past profits.

A buyback can be paid out of free reserves, the securities premium account or the proceeds of a new issue of a different kind of security. So a company with a big premium from its IPO, like ours, has more room to buy back than to pay dividends.

Why a company picks one or the other

There's no rule. These are the usual reasons boards give, and the reasons sceptics suspect.

• Habit. Shareholders come to expect a steady dividend, and cutting one looks bad. A buyback is a one-off, so a company can return spare cash without promising to repeat it.
• Choice. A buyback lets each shareholder decide. Those who want cash sell; those who want to stay get a bigger share of the company. A dividend gives everyone cash, wanted or not.
• A message about the price. Offering ₹60 when the market says ₹54 signals that the board thinks the shares are worth more. Whether it's right is another matter.
• Control. If the promoter doesn't sell, a buyback lifts his stake. Sameer goes from 60% to about 63% without spending a rupee.
• Tax. It used to tip boards one way or the other, and the rule has changed twice in two years. Since April 2026, ordinary sellers pay capital gains rates and promoters pay more.
• Paperwork. A ₹15 crore buyback needs a special resolution, a tender offer and SEBI's buyback rules. A dividend needs a board recommendation and an ordinary AGM vote.