What is IDCW in Mutual Funds? 

Mutual funds are a popular investment option for people who want to increase their wealth smartly. There are so many types of mutual funds available in the market, so it is a little bit difficult to understand each strategy and terminology of them. IDCW full form in mutual fund is Income Distribution cum Capital Withdrawal is one of the famous mutual fund plans that is introduced by SEBI (Securities and Exchange Board of India) in April 2021 and is a substitution of “Dividends” in a mutual fund to IDCW. 

This blog will teach you about the meaning of IDCW in mutual funds, how it works, benefits, types, and taxation details in detail. So, let’s jump into the blog.  

What is IDCW in Mutual Funds? 

IDCW meaning in mutual funds, it’s like a feature that allows the investors to receive income from dividends, and they can withdraw the invested capital flexibly. It is an attractive scheme because through this the investors can get a regular income and achieve the freedom to access their capital as per their need. That’s why it is considered a convenient way for investors to reach their financial goals effectively.  

How Does Income Distribution cum Capital Withdrawal Work? 

Income Distribution cum Capital Withdrawal or IDCW is like a payout option offered by mutual funds. Here’s how it works;

🔸 Mutual funds pay out a portion of your investment from the income earned or by returning part of the investor’s original capital.

🔸 These payouts aren’t guaranteed and depend on the specific fund’s performance.

🔸 The Net Asset Value (NAV) of your units reduces after each payout because the money is withdrawn from the fund.

For example;  

If you invest ₹1,00,000 in a mutual fund with a NAV of ₹100, if the fund declares IDCW of ₹5 per unit, you’ll receive ₹5,000 and the NAV will decrease to ₹95.  

Benefits of IDCW in Mutual Funds 

Generating Regular Income 

IDCW distributes regular income from mutual fund investments, like a paycheck from your investments, and it offers a steady income stream for all.

Cashflow Management 

It allows us to manage cash flow better. The periodical income distributions will cover all your regular expenses so it can be more suitable for your retirement time.  

Tax Benefits 

The taxation aspects of IDCW are as follows;

🠖 Tax of IDCW: The income received under this scheme is taxable as per the individual’s income tax slab. If you fall under the 30% tax slab, your IDCW earnings will be taxed at 30%.  

🠖 TDS on IDCW: If your total income from IDCW exceeds Rs. 5000, the Deducted at Source (TDS) will be 10%. This deducted TDS will be credited to your income tax account and is adjusted against your final tax liability.  

Convenient for Passive Investors

This option is most suitable for passive investors who prefer a hands-off approach to managing their investments.  

No Need to Redeem Units 

Most investors choose this option because they receive payouts without redeeming their mutual fund units. This means they can continue to stay invested in the funds and receive benefits from future market growth.  

Types of IDCW in Mutual Funds 

IDCW – Periodic (Regular/Quarterly/Monthly)

This type of mutual fund declares the income distribution periodically like, monthly, quarterly, or annually. It is suitable for investors who want a fixed income such as retirees.  

IDCW – Payout 

If a fund declares an IDCW, the amount will directly be credited to the investor’s bank account. It is suitable for those who need liquidity or want to use the income for regular expenses.  

IDCW – Reinvestment 

Instead of cash distribution, they will be reinvested in the same scheme by purchasing additional units. It is suitable for investors who prefer compounding returns but still want the benefit of period distributions.  

Taxation in IDCW Plan in Mutual Funds

In an Income Distribution cum Capital Withdrawal plan, payouts are treated as income in the hands of the investor and are taxed accordingly. Unlike earlier the mutual funds paid DDT or Dividend Distribution Tax, now the investor must pay tax on IDCW. It is not treated as capital gains, so it doesn’t add any indexation or long/short-term benefits. If the IDCW exceeds ₹5,000 in a financial year TDS at 10% is applicable for resident individuals. For NRIs, it is deducted higher rates as per applicable laws.  

Who Should Invest in IDCW in Mutual Funds?

1. Retirees and Senior Citizens 

Those who rely on regular income to meet their living expenses.  

2. Passive Investors 

The people who don’t want to actively manage redemptions and prefer a hands-off approach. 

3. Short-term Investors  

Investors prefer cash returns over capital appreciation.  

4. Investors Seeking Liquidity 

They need frequent access to short-term goals or expenses, so they receive money at intervals while staying invested.  

Conclusion

The meaning of IDCW in mutual funds is like a way for investors to receive periodic payouts without redeeming their units. And it is a better option for people seeking regular income, such as retirees and passive investors. We hope that through this blog you get the knowledge about it and that will lead to fulfilling your financial goals.  

So, choose your mutual fund strategy wisely by downloading the Navia App and investing smarter with our easy tracking tools.  

Do You Find This Interesting?

Frequently Asked Questions

DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.