IDCW Plans: Simplifying Income and Capital Distributions in Mutual Funds

Starting April 1, 2021, the Securities and Exchange Board of India (SEBI) renamed dividend option plans to IDCW option plans. IDCW stands for Income Distribution cum Capital Withdrawal. This option involves redistributing part of your capital and income earned under the plan/s back to you as dividends, essentially returning a portion of your investment to you. 
 

Here's how Income Distribution cum Capital Withdrawal (IDCW) works: 

Income Distribution: When a mutual fund has a distributable surplus, it can reinvest them or distribute them to investors.

IDCW: Whenever distributable surplus is distributed, it includes both income distribution and capital distribution and based on the units held by the investors in the Fund.   

Taxation: IDCW payments often at a lower rate than regular income, making them a tax-efficient way to receive regular income. 
 

There are two main types of IDCW option plans, and they are: 

IDCW Payout Option: In this plan, the mutual fund distributes the accumulated profits to investors at regular intervals. Once the distribution is made, the net asset value (NAV) of the fund decreases by the amount of the payout. 

IDCW Reinvestment Option: Instead of receiving the payout in cash, the profits are reinvested back into the mutual fund, purchasing additional units for the investor. This increases the number of units the investor holds, while the NAV of the fund reduces by the payout amount. 

The IDCW Plan clarifies for investors that their returns include both income distribution and capital withdrawal. 

While SEBI changed the name from Dividend Plan to IDCW plan, everything revolving around this concept is still the same.  
 

Disclaimer:

Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.