The buyback illusion

Saturday morning, second coffee, and a cousin drops a screenshot into the family group with two words sitting on top of it. "Finally compounding." It is a results slide from a company he has held for two years, and the line he has circled reads earnings per share up seventeen point six percent. He is not wrong to be pleased. A number with the words per share in it went up by almost a fifth, and every app he owns has taught him that is the number that matters.

I asked him to scroll up two lines, to the one that says net profit.

Net profit had barely moved. Same business, roughly the same money earned, give or take a rounding error. The per share number had jumped almost eighteen percent while the profit behind it stood nearly still. He looked at it for a second and asked the obvious thing. How does earnings per share go up when earnings did not.

Here is the quietest sleight of hand in company reporting. The company had bought back a slab of its own shares and cancelled them. Same earnings, fewer slices, so each slice is now a bigger piece. Nothing about the business improved. The denominator just got smaller.

A buyback does not make a company earn more. It makes the same earnings land on fewer shares, and most people read that as growth.

A buyback shrinks the slices. It does not bake a bigger cake.

So I pulled the line under the headline

Earnings per share is one of the most quoted numbers in investing and one of the least understood, because it is a fraction and people only look at the top of it. Profit on top, share count on the bottom. Move either one and the number moves. Grow the profit and you have earned the increase. Shrink the share count and you have manufactured it.

Take a company earning a flat one thousand crore, with a hundred crore shares outstanding. That is ten rupees of earnings per share. Now it buys back and cancels shares, and watch what the same one thousand crore does as the slice count falls.

Illustrative

Retire five percent of the shares and earnings per share rises about five percent. Retire fifteen and it jumps almost eighteen, on a business that earned not one extra rupee. The bar you are looking at is not growth. It is division. And the further right it runs, the more a flat company looks like a compounding one on the only line most people bother to read.

The number that grew was the denominator

The maths is not hard, which is exactly why it works on people. Retire a slice x of the shares and earnings per share gets multiplied by one over one minus x. Cut ten percent, divide by point nine, and you get an eleven percent lift that nobody in the building earned. It fell out of the arithmetic.

Real results usually mix both effects, which is why the headline needs splitting. Put in the profit growth and the share count cut, and the calculator separates what the business earned from what the arithmetic added.

5 pct profit growth plus a 10 pct buyback prints 16.7 pct EPS growth

Net profit growth (%) Shares bought back and cancelled (%)

EPS growth on the slide

16.7%

Of which the business earned

5.0%

Of which came from fewer shares

11.7 points

EPS = net profit / shares. Worked example, not a listed company.

Illustrative

Shares bought back	Shares left, crore	Net profit, Rs cr	Earnings per share, Rs	Vs base
none	100	1000	10.00	base
5 pct	95	1000	10.53	plus 5.3 pct
10 pct	90	1000	11.11	plus 11.1 pct
15 pct	85	1000	11.76	plus 17.6 pct

Every row in that table is the same company earning the same money. Only the share count moved. The most famous version of this is not Indian. One large US technology company spent more than six hundred billion dollars buying back its own stock between 2012 and 2024 and dropped its share count from about twenty six and a half billion shares to about fifteen point four, roughly forty two percent fewer. Every remaining share now owns a bigger piece of the same company, which flatters per share growth even in years the business itself was flat. If you want the plain version of how earnings per share is built before we go on, we keep one in the Learn hub.

A buyback is not free money, it is your money

Now the part that sounds like heresy the first time you hear it. A buyback is not the company giving you something. It is the company handing back cash that was already yours.

The money a company spends buying its own shares comes off its own balance sheet, and that balance sheet belongs to the shareholders. So a buyback returns capital, exactly like a dividend, just routed through the market instead of your bank account. Whether it does you any good comes down to one thing. The price it paid. Buy back shares that are genuinely cheap and the holders who stay are better off, because the company retired ownership on the cheap. Buy back shares that are dear and it flips, the leavers get paid a rich price and the stayers quietly fund it. Same action, opposite outcomes, and the press release never tells you which one you are standing in. Reading the actual profit line under the headline is the whole reason the per stock factsheets exist.

Then in October 2024 the tax quietly flipped

For years a buyback in India was the tax smart way to hand cash back. The company paid a buyback tax, about twenty three percent all in, and the shareholder received the money completely free of tax. Promoters liked it, funds liked it, and for a top slab investor it beat a dividend, which lands as ordinary income.

That ended on the first of October 2024. The old company level buyback tax is gone. In its place, the entire amount you receive in a buyback is treated as a deemed dividend and taxed in your hands at your slab rate, with no credit for what you paid for the shares in the first place. For someone in the top bracket that was an effective 35.88 percent. It did not last. From 1 April 2026 a buyback is taxed as a capital gain instead, only on what you receive over your cost, and promoters pay a higher effective rate.

1. Jul 2019Buyback tax extended to listed companies

   The company pays about 23 percent all in on the amount distributed. The shareholder receives the money tax free.

2. 1 Oct 2024Taxed as a dividend, in your hands

   The whole amount received is taxed at your slab rate, with no deduction for cost. The cost becomes a capital loss.

3. 1 Apr 2026Taxed as a capital gain

   Only what you receive over your cost is taxed, at 12.5 or 20 percent by holding period. Promoters pay an effective 22 percent (domestic companies) or 30 percent (others).

Illustrative

Run one hundred thousand rupees of buyback through both worlds. Before, a top slab investor kept the whole lakh. After, the same investor keeps about sixty four thousand, and the cost of the shares they tendered turns into a capital loss they then had to find gains to use. The buyback did not change. The route the money takes to reach you did, and it now walks through a tollgate it used to skip. If you want to see how differently a rupee reaches you as a dividend, a buyback, or a plain capital gain, put them next to each other in the compare view.

There are three worlds now, not two. Take the same Rs 1,00,000 tendered by a top slab holder whose shares cost Rs 60,000 and were held more than a year.

The same Rs 1,00,000 buyback kept Rs 64,120 in 2025 and keeps Rs 94,800 now

Amount received (Rs) Your cost of those shares (Rs) Slab rate with surcharge and cess (%) Capital gains rate with cess (%)

Kept before Oct 2024

Rs 1,00,000

Kept, Oct 2024 to Mar 2026

Rs 64,120

Kept from Apr 2026

Rs 94,800

Non promoter shareholder. 13 percent = 12.5 percent long term rate plus 4 percent cess; use 20.8 for a holding of 12 months or less. Ignores the Rs 1.25 lakh yearly long term exemption and the use of the 2024 to 2026 capital loss. Worked example.

The calendar trick in the next section shows how much companies cared about these rules. The free Learn module on capital allocation covers when a buyback is a good use of cash and when it is not, and the share dilution note runs the same fraction the other way.

The tell was in the calendar, not the value

Here is the part I keep coming back to. If a buyback is really about scooping up your own cheap shares, the timing should follow the price. It followed the tax instead.

In the three weeks after the July 2024 budget announced the change, fifteen listed companies rushed out buyback plans. In the whole seven months before that, there had been eighteen. Close to a year of buybacks got crammed into a scramble to beat a tax date, which tells you what a lot of them were actually about. Not a cool headed judgment that the shares were a bargain. A window closing. When the reason a company hands back cash is a deadline on a calendar, the odds that it is also buying at a genuinely good price are not high.

The honest part, where a buyback actually helps

I do not want to leave this as buybacks bad, because that is lazy and it is wrong.

A buyback done well is a fine thing. When a company throws off more cash than it can sensibly reinvest, handing it back beats letting it itch a hole in the balance sheet and get spent on some empire building acquisition nobody asked for. Bought at a sensible price, a buyback quietly concentrates every loyal holder's stake in a business they already wanted more of. It is more flexible than a dividend, which the market punishes a company for ever cutting once it has started. And a rising per share number, when it sits on top of a rising profit, is the real thing and worth paying up for. The mistake is not the buyback. The mistake is reading the per share line as growth without checking whether the profit line grew too. The company that grew its earnings and the company that merely shrank its share count can print the exact same headline, and only one of them actually got better. I cannot tell you from a single slide which one you are holding. I can tell you the two lines it takes to find out.

Three ways to read a buyback

Read the profit line before the per share line. If earnings per share is up and net profit is flat, the growth is arithmetic, not business.

Ask what price they paid. A buyback of cheap shares rewards the holders who stay, a buyback of dear shares rewards the ones who leave, and the company is doing one of those two. Find out which.

Count the tax, not the sticker. From October 2024 to March 2026 a buyback reached you as slab taxed income, so a top slab holder kept closer to two thirds of it. Since April 2026 it is taxed as a capital gain on your profit over cost. The old free lunch is still off the menu.

The per share number is the easiest line in the entire report to move without moving the business. Read the one sitting underneath it first. That is the one nobody can fake with a fraction.

Questions readers ask

How is a share buyback taxed in India in 2026?

From 1 Apr 2026, a shareholder who tenders shares in a buyback pays capital gains tax only on the amount received over the cost, at 12.5 percent for holdings over 12 months or 20 percent otherwise. Between 1 Oct 2024 and 31 Mar 2026 the whole amount was taxed at slab rates as a dividend. Promoters pay an effective 22 or 30 percent.

Does a buyback increase earnings per share?

Yes, mechanically: cancelling 10 percent of the shares lifts EPS by about 11.1 percent even if profit is flat. That lift is arithmetic, not business growth, so the net profit line is the one to compare.