Buy-back of shares is more advantageous to the promoters than a hefty dividend payment.

In the case of dividend payment, the net worth of the Company gets reduced without any reduction in the number of equity shares and hence the valuation of the shares of the company is also reduced and increase earning per share for future periods. But in the case of buy-back, there is a simultaneous reduction in the net worth as well as the number of equity shares and hence the value of security is not affected. However, it is to be noted that future earnings per share will improve with the reduction in the number of equity shares. Buy-back gives an indication of a fair market value of the share in the market. Further, it enables the promoters to consolidate their stake. Both the options leave some cash in the hands of the shareholders. In terms of taxation (which of course can change from time to time), while dividend payment attracts a Dividend Distribution Tax at an effective rate prescribed under section 115O of the Income Tax Act, 1961 payable by the company out of its profits over and above the amount of dividend declared, the tax in case of buy-backs by listed companies, is provided for under Section 112A of the Income Tax Act wherein the distributed income (capital gain from buybacks to the shareholder) upto ₹10,00,000 is tax free in the hands of the investor and the amount of distributed income beyond ₹10,00,000 is taxed @10 percent, in the hands of the shareholder. Further in case of Buy-back of shares by an unlisted company, under Section 115QA of the Income Tax Act, the amount of distributed income is taxable @ 20% in the hands of the company. Accordingly, from a Promoter's point of view a buy-back of shares is more beneficial as compared to Dividend payment.