All You Need to Know About Income Distribution cum Capital Withdrawal Option of Mutual Funds

Posted On Wednesday, Sep 21, 2022


When you invest in mutual funds, you have broadly two options to choose from. You can choose the Growth option or the Income Distribution cum Capital Withdrawal (IDCW) option. The latter was earlier known as the Dividend option.

The underlying portfolio of growth, IDCW or any other option of a scheme is the same. However, the difference lies in the way the scheme distributes the profits under each option.

If you opt for the growth option, the profits made are reinvested in the scheme, which is reflected in the NAV. Whereas in the IDCW (erstwhile dividend) option, profits are distributed to the investors either partially or fully at the discretion of the fund manager.

In April 2021, the capital market regulator SEBI directed mutual funds to rename the Dividend option as the IDCW option. The objective behind this was to use the correct nomenclature. Many investors misunderstood dividends declared by mutual funds as a bonus over and above the returns delivered by a scheme. This was quite misleading and could affect an investor's investment plan. Therefore, SEBI decided to rename the Dividend plan to IDCW to explain the differences clearly, avoid misconceptions, and promote transparency.

The dividend declared by a mutual fund is, in fact, the income arising from the investors’ invested capital. This is why the NAV of the scheme falls to the extent of the dividend paid by the scheme under the IDCW plan. The resulting reduced NAV after the payment of the dividend is called ex-dividend NAV.

It is important to note that IDCW declared by mutual fund schemes are subject to distributable surplus, which is a function of market conditions and the performance of the scheme. Distribution of scheme profit by way of IDCW is declared at the discretion of the fund manager. IDCW may include dividends paid by the underlying stocks and capital gains made by selling such stocks from the scheme’s portfolio.

Old terminologyNew terminology
Dividend PayoutPayout of Income Distribution cum Capital Withdrawal (IDCW)
Dividend Re-InvestmentReinvestment of Income Distribution cum Capital Withdrawal (R-IDCW)
Dividend Transfer PlanTransfer of Income Distribution cum Capital Withdrawal (T-IDCW)

In the payout of the IDCW option, investors receive the income in their registered bank account. Accordingly, the number of units held by an investor in the scheme remains the same.

In the case of Reinvestment of the IDCW option, investors do not receive the income in their bank account. The income payments are reinvested in the scheme, and unitholders receive additional units.

The transfer of IDCW is a facility that allows investors to automatically transfer IDCW earned in a mutual fund to another scheme within the same fund house, for instance, from debt to equity fund. Mutual funds generally specify a minimum amount of income that can be transferred.

IDCW taxation

As per the income tax rules, with effect from April 01, 2020, dividends received from mutual fund schemes are taxable in the hands of the investors as per the income tax slab applicable to them. Thus, if you fall under the 30% tax bracket, you will have to pay 30% tax on the IDCW amount.

In addition, a TDS at the rate of 10% will be applicable if the dividend amount exceeds Rs 5,000 in a financial year. Consequently, the taxes will eat into your returns. Thus, the IDCW is not a tax-efficient option, especially for those in the higher tax bracket.

Should you opt for the IDCW option?

Investors generally opt for the IDCW option to earn a regular stream of income. However, it would not be wise to depend on IDCW for a source of income because there is no assurance on the timing and quantum of profit distribution.

Furthermore, since the profits of the scheme are periodically paid out to investors money, it puts brakes on the process of compounding.

On the other hand, if you opt for the Growth option, that will help your money grow through the power of compounding as the profits are reinvested in the scheme. And if you want a regular inflow through your invested mutual funds corpus, you can opt for the Systematic Withdrawal Plan (SWP) option, which will allow you to withdraw a fixed amount at a pre-specified regular interval.

Happy Investing!

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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