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 is an IDCW plan, 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 they work.

IDCW Meaning in Mutual Fund

If you’re wondering exactly what is IDCW 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 you 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 who are looking for long-term capital appreciation.

Benefits of IDCW in Mutual Funds

IDCW in mutual funds offers several benefits-

- 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 source 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.

These benefits make IDCW a practical choice for investors who want 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'21, with the aim of giving more clarity to investors. You see, a novice investor might understand that ‘Dividend Option’ means that 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 is IDCW and IDCW meaning in mutual fund, 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 wanting 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 ÷ ₹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 of 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.

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.

To Sum Up

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.

FAQs

What is the benefit of IDCW in mutual funds?

IDCW offers regular income to investors through dividend payouts while keeping the investment intact. It helps manage cash flow efficiently and supports financial planning for those who need periodic income without fully redeeming their mutual fund investments.

Which is better – Growth or IDCW in a mutual fund?

The choice depends on your financial goals. IDCW is suitable for investors who need regular income. Growth funds are better for those focused on long-term wealth creation, as they reinvest earnings to achieve compounding benefits.

What are the disadvantages of IDCW?

A disadvantage of IDCW is its taxation based on the investor's income tax slab, which can increase the tax burden. Additionally, frequent payouts may limit the compounding effect compared to growth funds, which reinvest earnings for better long-term returns.

Is IDCW taxable in mutual funds?

In India, IDCW in mutual funds is taxable. If total dividends exceed INR 5,000 in a financial year, a 10% TDS will be deducted by the Asset Management Company. Dividends are taxed based on the investor’s income slab.

What is the meaning of IDCW monthly?

IDCW, or Income Distribution cum Capital Withdrawal, is the dividend option in mutual funds. It allows investors to receive regular payouts from their investments. Monthly IDCW means dividends are distributed on a monthly basis.

Which mutual fund IDCW is best?

The best IDCW mutual fund depends on your financial goals, risk tolerance, and investment horizon. Look for funds with a consistent dividend history, low expense ratio, and strong underlying asset performance to suit your requirements.

Is IDCW taxable in India?

Yes, IDCW is taxable in India. Dividends exceeding Rs. 5,000 in a financial year attract a 10% TDS. The dividends are also taxed as per the investor’s applicable income tax slab.