Determining whether to provide shareholders a dividend or a share repurchase remains a difficult decision for the Indian business. Dividends continue to be an excellent way to provide shareholders more money, despite the greater potential tax burden.

In FY2023, India Inc.’s overall incentive kitty—the sum of dividend distributions and share buybacks—fell to 4.85 percent, the lowest level since FY2016.

According to analysts, it depends on one’s viewpoint on which of the two is more tax-efficient. Currently, a company that pays a dividend does not have to pay any tax because the recipient is responsible for paying the appropriate amount of tax based on his personal tax bracket. The buyback tax, on the other hand, is effectively greater than 20% for a company.

According to Prime Database, ICICI spent Rs 21,453 crore on share buyback programs in FY23, but the total amount of dividends paid was Rs 4.4 lakh crore, almost 20 times higher.

Due to tax abnormalities, the percentage of buybacks in the overall awards kitty (Dividend + Buyback) rose between FY2017 and FY2029. As of April 1, 2016, the government eliminated the tax on listed company buybacks and added a further 10% tax to dividends, bringing the effective dividend distribution tax (DDT) to 20.6%. The percentage of buyback in the entire reward pool was only 1% in FY26, but it climbed to an average of 25% from FY2017 to FY2019.

From April 1, 2019, the government provided a 20% buyback to address tax-related difficulties. DDT was eliminated a year later, and shareholders now had to pay the tax. There were rumors that the administration may act on a repurchase plan similar to the last general budget.

From the standpoint of a significant shareholder, buyback could end up being more advantageous given the current circumstances. Large promoter-backed corporations like TCS and Wipro have turned to buybacks rather than dividends in recent years as a result of this. On Wednesday, TCS is probably going to announce another significant repurchase. Analysts predict that if Indian industrials’ financial sheets improve, buybacks will be feasible.