IDCW in India, or Income Distribution cum Capital Withdrawal, is a payout option in mutual funds. Replacing the term “dividend” since SEBI’s 2021 rule, it offers regular income from fund profits or capital. With mutual fund AUM at ₹65.74 lakh crore in 2025, per AMFI, IDCW is popular. How does it work? Let’s break it down.
What Is IDCW?
In India, the term “IDCW” stands for Income Distribution cum Capital Withdrawal. Introduced by the Securities and Exchange Board of India (SEBI) in April 2021, IDCW replaced the term “dividend” in mutual funds to clarify that payouts may include both income and a portion of the investor’s capital. This change aims to provide investors with a clearer understanding of their investments and the nature of the payouts they receive.
How Does it Work?
When you invest in a mutual fund under this option, the fund may declare a distribution based on its earnings and capital gains. For instance, if you hold 1,000 units of a fund and it declares a ₹2 per unit distribution, you’ll receive ₹2,000. This amount is either paid out to you or reinvested to purchase additional units. However, the NAV of the fund will drop by ₹2 per unit on the ex-dividend date, reflecting the distribution.
It’s crucial to understand that these distributions are not additional earnings but a return of your invested capital. Therefore, while it provides liquidity, it doesn’t contribute to wealth creation through compounding.
Pros and Cons:
Advantages:
- Regular Income: IDCW provides periodic payouts, which can be beneficial for investors seeking regular income, such as retirees.
- Flexibility: Investors can choose between receiving cash payouts or reinvesting the distributions to purchase additional units.
Disadvantages:
- Tax Implications: As discussed, IDCW payouts are subject to taxation based on the investor’s income tax slab, which can reduce the overall returns.
- Impact on NAV: The Net Asset Value (NAV) of the mutual fund decreases by the amount of the distribution, which may affect the perceived value of the investment.
- No Guaranteed Returns: Distributions are not assured and depend on the fund’s performance and the AMC’s discretion.
Taxation:
Prior to April 2020, mutual funds paid a Dividend Distribution Tax (DDT) on dividends declared. However, the Finance Act 2020 abolished DDT, shifting the tax liability to investors. Now, IDCW payouts are taxed according to the investor’s income tax slab. Additionally, if the total dividend income exceeds ₹5,000 in a financial year, a Tax Deducted at Source (TDS) of 10% is applicable . This means that investors in higher tax brackets may face a significant tax burden on their IDCW earnings.
Is IDCW Right for You?
This may be suitable for investors who require regular income and are aware of the associated tax implications. However, for those seeking long-term capital appreciation and tax efficiency, the growth option might be more appropriate. It’s essential to assess your financial goals, tax bracket, and investment horizon before choosing between IDCW and growth options. Learn more at the SEBI website.
Conclusion:
Understanding IDCW in India is essential for making informed mutual fund investment decisions. IDCW in India offers income flexibility but requires tax and risk awareness. IDCW offers regular income but comes with tax implications and reduced NAV. It suits income-focused investors, while growth options may benefit long-term wealth seekers. Ready to pick your plan? Explore more mutual fund insights now!
– Ketaki Dandekar (Team Arthology)
Read more about IDCW here – https://www.bajajfinserv.in/idcw