What is IDCW in Mutual Funds? A Complete Guide

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In investments, most investors focus on long-term wealth creation or the achievement of defined financial objectives. However, there are many investment schemes that offer investors to earn income from their investments and even withdraw a portion of their invested capital, one of such schemes is Income Distribution Capital Withdrawal plan.  In this article, we will cover what IDCW in mutual funds is and how you can invest in it.

What is IDCW in Mutual Funds?

IDCW stands for Income Distribution Capital Withdrawal. It refers to a mutual fund plan that distributes earnings to investors periodically or capital gains. As an investor, this fund will regularly provide part of the profits on your investments back to you.

Mutual Fund Statement of Account (SOA) issued by the AMC reflects this change by displaying “IDCW” beside schemes that were earlier marked as dividend option.

Why did SEBI rename “Dividend Plan” as “IDCW” plan?

The Securities and Exchange Board of India (SEBI) officially renamed the ‘Dividend Plan’ to ‘Income Distribution cum Capital Withdrawal (IDCW) Plan’ on April 1, 2021. The change was introduced to bring greater clarity and transparency for investors. Earlier, many investors assumed that the “dividend” received from mutual funds was similar to dividends declared by companies out of profits. In reality, these payouts were often made from the investor’s own capital or accumulated gains of the scheme.

By using the term IDCW, SEBI highlighted that the distribution could be from income earned as well as from the capital invested, ensuring that investors have a clearer understanding of how their returns are being distributed.

How Does IDCW (Income Distribution cum Capital Withdrawal) Plan Work?

As an investor, it is equally important to understand how IDCW mutual funds function, in addition to knowing IDCW’s meaning in mutual fund.

1. A scheme may declare IDCW, which is then allocated to investors according to their invested amount.
2. After the distribution of earnings, investors can choose to withdraw a portion of their capital, which is subject to redemption charges or exit loads set by the mutual fund scheme.
3. Investors also have the option to withdraw lump-sum amount for systematic withdrawal plans (SWP) which distributes funds at defined intervals.

It is important to note that all the operations of IDCW are regulated by the Securities and Exchange Board of India (SEBI).

Example of IDCW

Initial Investment: You invest INR 1,00,000 in an IDCW plan.

Fund Performance After 1 Year:

• The fund earns INR 6,000 as income (through interest, dividends, or capital gains).
• The NAV (value of units) also increases by INR 4,000.
• So, your total value = INR 1,00,000 + INR 6,000 + INR 4,000 = INR 1,10,000.

IDCW Payout Announced: The fund declares an IDCW of INR 5,000.

Source of Payout:

• Out of this INR 5,000, INR 3,000 comes from the income earned by the fund.
• The remaining INR 2,000 is taken out of your invested capital.

Result:

• You receive INR 5,000 in your bank account.
• But your fund value reduces by INR 5,000 (since it’s distributed to you).
• New value of investment = INR 1,10,000 – INR 5,000 = INR 1,05,000.

Key Point: IDCW is not always “extra profit.” It can also include part of your own money being returned, which is why SEBI renamed the dividend option as IDCW.

Types of IDCW in Mutual Funds

There are different types of IDCW in Mutual Funds to meet different purposes of investors and their financial goals. These options give investors the choice of how they want to receive their returns.

• IDCW Payout: This type of IDCW plan offers earnings at regular intervals. For instance, with an investment of INR 1,00,000 in a mutual fund offering quarterly IDCW, a declared payout of INR 2,500 will be transferred to the investor’s bank account.
• IDCW Reinvestment Option: In this option, any declared IDCW, including IDCW interim payouts, is reinvested in the same fund instead of distributing earnings which increases the investor’s total units held in the AMC.
• IDCW Sweep Option: Investors can maintain their investment while having flexibility by having payouts automatically transferred into a liquid or overnight fund.

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Benefits of IDCW in Mutual Funds

Investors have several benefits to derive from IDCW plans, depending on the mode of receiving payouts.

• Normal Cash Flow: Investors can receive regular payouts for everyday use or expenditure.
• Growth of Wealth: When IDCW is reinvested, it allows compounding to work, which can increase returns over time.
• Flexibility: Investors can select the mode of receiving payouts—cash, reinvestment, or sweep, according to their financial objectives.
• Liquidity Management: IDCW offers access to funds without removing a portion of the investment from the market.
• Transparency: Periodic IDCW Interim announcements provide transparency on payments and investment performance.

Features of IDCW in Mutual Funds

IDCW schemes have certain features that characterize how payments are computed, declared, and received.

• Periodic Declaration: IDCW may be declared monthly, quarterly, half-yearly, or yearly.
• Income and Capital Component: The payouts can consist of fund income and part of the invested capital.
• Options: Types of IDCW are payout, reinvestment, or sweep.
• NAV Adjustment: The NAV reduces in proportion to the IDCW amount distributed.
• Tax Treatment: The payouts of IDCW are liable for income tax, and TDS will apply in case of exceeding the notified limit on the dividends.

How is IDCW Different from the Growth Option?

Investors can choose between IDCW and Growth options depending on whether they prefer regular income or long-term capital growth. The table below highlights the key differences:

Taxation Rules on IDCW Income

IDCW payouts from mutual funds are subject to taxation based on the type of fund and the investor’s applicable tax slab.

Equity Mutual Funds

• Short-Term IDCW: If units are held for less than 12 months, IDCW is taxed at 15% plus applicable cess.
• Long-Term IDCW: If units are held for more than 12 months, IDCW is tax-free in the hands of the investor.

Know More About: Equity Mutual Fund

Debt Mutual Funds

• Short-Term IDCW: If units are held for less than 36 months, IDCW is added to the investor’s income and taxed as per their income tax slab.
• Long-Term IDCW: If units are held for more than 36 months, IDCW is taxed at 20% with indexation benefits.

Know More About: Debt Mutual Fund

TDS on IDCW

IDCW payouts are subject to Tax Deducted at Source (TDS). If your total dividend income from mutual funds in a financial year exceeds INR 5,000, the AMC deducts TDS at the applicable rate before crediting the payout. Currently, TDS at 10 percent applies, and it is applicable to both equity and debt funds. The exact tax liability will then depend on your income tax slab.

Investors should consider these taxation rules while choosing between IDCW and Growth options, as it impacts the effective returns from their investments.

Who Should Invest in the IDCW Plan?

The IDCW Mutual Funds plan is suitable for investors seeking periodic income from their investments rather than long-term capital growth.

Regular Income Seekers

Individuals who require steady cash flow for personal expenses, such as retirees or those with fixed financial obligations, can benefit from IDCW payouts.

Short- to Medium-Term Investors

Investors looking to receive returns at regular intervals over a defined period may prefer IDCW overgrowth options.

Flexible Investors

Those who want the option to reinvest payouts or use the sweep facility for liquidity can make effective use of IDCW features.

Income-Focused Portfolio Builders:

IDCW plans can complement other investment strategies by providing predictable income alongside growth-oriented assets.

By understanding their financial goals and cash flow needs, investors can decide whether IDCW Mutual Funds align with their investment strategy.

What Are the Misconceptions About Mutual Fund Dividends in India?

Many investors misunderstand how mutual fund dividends, now called IDCW, work. Common misconceptions include:

Dividends Are Guaranteed

Investors often believe that dividends are assured. In reality, IDCW payouts depend on the fund’s performance and are not guaranteed.

Dividends Are Only Income

Some think payouts come entirely from profits, but IDCW can include a portion of the investor’s capital.

Dividends Are Tax-Free

Equity IDCW may be tax-free in certain cases, but debt IDCW and large payouts can be taxable, with TDS applicable.

Higher Dividend Means Better Performance

A higher IDCW payout does not necessarily indicate superior fund performance; NAV reduction and capital distribution should also be considered.

Difference between dividend declared by companies and IDCW from mutual funds

Investors often confuse company dividends with IDCW payouts from mutual funds. The key differences are:

Things to Consider Before Choosing IDCW Option

Before selecting an IDCW option, investors should evaluate the following factors:

Financial Goals

Determine if you need regular income or prefer long-term capital growth.

Investment Horizon

IDCW is better suited for short- to medium-term investors, while Growth options suit long-term wealth creation.

Tax Implications

Understand the taxation rules on IDCW payouts and TDS applicability, as they impact net returns.

Liquidity Needs

Decide whether you require cash payouts or prefer reinvestment or sweep facilities.

Fund Performance

Consider the mutual fund’s past performance, expense ratio, and stability before relying on periodic payouts.

Careful consideration of these factors helps investors choose the IDCW option that aligns with their financial strategy.

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Conclusion

IDCW Mutual Funds provide a flexible way to earn periodic income while maintaining investment in the market. By understanding how IDCW works, its types, benefits, taxation, and key differences from company dividends, investors can make informed decisions. Choosing the right option depends on individual financial goals, income requirements, and investment horizon. With proper planning, IDCW plans can serve as an effective tool for income generation and wealth management.

To manage your investments and explore IDCW options conveniently, consider opening a DBS Treasures Wealth Account, which offers personalized guidance and tools for smarter wealth planning.

Frequently Asked Questions

1. Which is better growth or IDCW?

   Growth is suitable for long-term wealth creation through compounding, while IDCW is better for investors seeking regular income from their mutual fund portfolio.

2. Which is better, SWP or IDCW?

   SWP (Systematic Withdrawal Plan) provides scheduled withdrawals from Growth units, offering more control over cash flow. IDCW provides periodic payouts from fund earnings and capital. Choice depends on income needs and flexibility.

3. What is the tax rate for IDCW?

   Equity IDCW: Tax-free if held >12 months; short-term (<12 months) taxed at 15%.

   Debt IDCW: Short-term (<36 months) taxed as per slab; long-term (>36 months) taxed at 20% with indexation. TDS of 10% applies if annual dividend > ₹5,000.

4. What is IDCW Payout?

   IDCW Payout is the periodic distribution of fund earnings and, in some cases, part of the invested capital to investors.

5. What Is the Difference Between IDCW And Dividend Payout?

   Company dividends come from profits and may not impact share price; IDCW payouts may include fund income and capital, reducing NAV. Tax treatment and payout frequency also differ.