What is IDCW (Income Distribution cum Capital Withdrawal)?

Seasoned mutual fund investors might be familiar with the ‘Dividend Option’ that mutual fund companies offer, wherein the dividends aren’t reinvested but rather distributed among unitholders. As of 2021, this option has been renamed to ‘Income Distribution cum Capital Withdrawal Plan’ or the IDCW Plan.  

This change in nomenclature has naturally caused some confusion among investors. If you’re wondering what is meant by IDCW in mutual funds, or what an IDCW plan is, you’re in the right place.

Here we discuss everything you need to know to clear the fog, from IDCW’s meaning and why SEBI changed the name of Dividend Option to how it works.

IDCW meaning in mutual funds

If you’re wondering exactly what IDCW is in MF, it is simply what ‘Dividend Option’ was previously. With mutual fund investment, you can choose how you want to receive your earnings. IDCW offers two options in this regard:

• Regular IDCW: This entails receiving a portion of your earnings, including your interest and the stock dividends, periodically. This is ideal for those wanting a steady source of income, such as retirees.
• Growth IDCW: This option reinvests your IDCW amount automatically into the fund and allows your earnings to compound over time. This is ideal for those looking for long-term capital appreciation.

Features of IDCW in mutual funds

Here are the various features of IDCW in mutual funds:

• It provides regular payouts, similar to receiving a paycheck from your investments.
• IDCW dividends are taxed at a lower rate than capital gains, providing potential tax benefits.
• It offers diversification and serves as a stable income for investors.
• Investors can use these periodic payouts for daily expenses, EMIs, or retirement planning.
• IDCW strikes a balance between generating income and growing your capital.

IDCW is a practical choice for investors who want a steady income while allowing their investments to grow. It helps you manage regular financial needs without the need to liquidate your investments.

Why did SEBI change the name of dividends to IDCW?

SEBI notified investors of this change via a circular in April 2021 to give more clarity to investors. You see, a novice investor might understand that ‘Dividend Option’ means the mutual fund will pay dividends like stocks do. This is incorrect.

The new name, IDCW, highlights that the income distributed to investors is not dividends but their own money, which includes the investment returns as well as dividends paid by companies.

How Does IDCW Work?

Now that you know what IDCW is and IDCW’s meaning in mutual funds, here are some points to keep in mind:

• IDCW includes interest earned by the fund and stock dividends, making them different from regular payouts from the mutual fund.
• IDCW can include your initial investment amount or principal invested in the mutual fund.
• IDCW can reduce the total invested amount, unlike the growth option, wherein payouts are reinvested.
• IDCW suits those seeking a regular income stream as it offers limited capital access, which is still being invested.

Example of IDCW

Here’s an example to explain how IDCW works:

Suppose you invest Rs. 1,00,000 in a mutual fund under the IDCW option with a Net Asset Value (NAV) of Rs. 20. This gives you 5,000 units (Rs. 1,00,000 ÷ Rs. 20). After six months, the fund declares a dividend of Rs. 2 per unit as IDCW.

You receive Rs. 10,000 as income distribution (5,000 units × Rs. 2). This payout is a partial return on your invested amount and can either be taken as cash or reinvested to purchase additional units. After this distribution, the NAV reduces by Rs. 2 to Rs. 18, reflecting the dividend payment.

This shows how IDCW provides periodic income while keeping your remaining investment intact so that it can grow further.

Understanding IDCW Taxation

Before 2020, companies had to pay a 15% dividend distribution tax (DDT) on declared dividends. However, the 2020 budget removed this tax, transferring the responsibility to shareholders.

Now, income from IDCW plans is taxed as per the investor's income slab. If the dividend exceeds Rs. 5,000 in a financial year, AMCs deduct Tax Deducted at Source (TDS). For dividend income up to Rs. 5,000, no TDS is deducted.

This change places the tax obligation directly on investors while maintaining exemptions for smaller dividend payouts.

Types of IDCW in mutual funds

IDCW in mutual funds is of two types:

1. Regular IDCW: This type of IDCW provides regular income periodically in the form of monthly, quarterly, or yearly earnings. 
2. Growth IDCW: In this type of scheme, dividends are reinvested into funds with no distribution or disbursement of income to unitholders. 

Conclusion

While IDCW plans (formerly known as Dividend Option) don’t offer any additional benefit, after discussing IDCW’s meaning in mutual funds and how it works, it is clear that IDCW mutual fund schemes are a profitable alternative to regular investments such as sovereign savings schemes and fixed deposits.