IDCW
Also written Income Distribution cum Capital Withdrawal · Dividend option · IDCW option
The renamed dividend option of a mutual fund scheme — a payout that is part income and part return of your own capital, which is why the NAV falls by exactly the amount distributed.
In plain language
From 1 April 2021 the dividend option of a mutual fund scheme has been called Income Distribution cum Capital Withdrawal, and the clumsy name is the whole point.
A company's dividend is paid out of profit the company earned. A mutual fund "dividend" is paid out of the scheme's own NAV — so part of what arrives in your bank account is income the portfolio generated, and part is simply your own capital being handed back. Nothing has been created. The workbook renamed the option to reflect the actual situation about the income earned by the investor.
The proof is arithmetic: when a distribution is paid, the NAV falls to exactly that extent.
How it works
Three options exist within the same scheme, holding the same portfolio and therefore earning the same portfolio return. What differs is cash flow, unit count and tax.
| IDCW payout | IDCW reinvestment | Growth | |
|---|---|---|---|
| Money in bank account | Yes | No | No |
| Tax on distribution | Yes | Yes | Not applicable |
| Units increase | No | Yes | No |
| NAV | Falls by the distribution | Falls by the distribution | Captures everything |
The NAV before the distribution is paid is the cum-dividend NAV; the reduced NAV afterwards is the ex-dividend NAV, and a reinvestment is made at that ex-dividend NAV.
Tax changed in the Union Budget of February 2020. Dividend Distribution Tax was abolished, and the distribution is now added to the investor's taxable income and taxed at their applicable slab. TDS of 10 percent applies on the distribution if it exceeds Rs 5,000, resident investors included. The growth option, by contrast, lets gains compound untaxed until units are actually sold — the deferment of taxes.
The formula
IDCW per unit = Declared percentage × Face value (typically Rs 10)
Ex-dividend NAV = Cum-dividend NAV − IDCW per unit
Units on reinvestment = IDCW amount ÷ Ex-dividend NAV
Post-tax amount received = Distribution − tax at the applicable slab
A worked example
The workbook's own illustration, in rupees. Investors A, B and C each buy 100 units at a NAV of Rs 10, in the growth, IDCW payout and IDCW reinvestment options respectively. The NAV rises to Rs 12 and the scheme declares an IDCW of 10 percent.
The distribution is 10 percent of the Rs 10 face value = Re 1 per unit, not 10 percent of Rs 12.
- A (growth) receives nothing. His 100 units are worth Rs 1,200.
- B (payout) is paid Re 1 × 100 = Rs 100 into his bank account. His 100 units are now worth the ex-dividend NAV of Rs 11, so Rs 1,100 — plus Rs 100 in the bank. Total Rs 1,200.
- C (reinvestment) has his Rs 100 reinvested at the ex-dividend NAV of Rs 11, giving 100 ÷ 11 = 9.09 additional units, so 109.09 units at Rs 11 = Rs 1,200.
All three are worth Rs 1,200 on the ex-dividend date. Nobody gained. Now add tax: if B is in the 30 percent slab, his Rs 100 becomes Rs 70 after tax, while A pays nothing until he sells. That difference, compounding for years, is the real content of this page.
Why NISM asks about it
Chapter 9.3.2 sets up the three options and works this exact illustration; Chapter 8.3 (Income Distribution cum Capital Withdrawal) covers the tax change; Chapter 8.8 gives the 10 percent TDS above Rs 5,000. Expect the reinvestment computation (amount ÷ ex-dividend NAV), the true/false on whether an IDCW makes an investor better off, and the comparison question on which option is more tax-efficient — the growth option, because of the deferment of taxes.
Common exam traps
- An IDCW is declared on face value, not on NAV. Ten percent on a Rs 10 face value is Re 1 per unit however high the NAV has climbed.
- You are not richer after a distribution. The NAV falls by the same amount; a payout converts units into cash, and a reinvestment converts cash back into units.
- Reinvestment is taxed exactly like a payout, even though no money reaches the bank account — and it attracts stamp duty at 0.005 percent, because reinvestment is treated as a purchase.
- DDT is history. Since the February 2020 Budget the distribution is taxed in the investor's hands at their slab rate, which made it costlier for high-income investors and cheaper for those in exempt categories.
- Cum-dividend NAV is before, ex-dividend NAV is after. Reinvestment always happens at the ex-dividend NAV.
Where this is taught
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series XII · Chapter 5: Mutual Fundsintroduced here
- Series X-B · Chapter 10: Taxation of Debt Productsintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 8: Mutual fund Taxation
- Series V-B · Chapter 9: Investor Services
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- UnitThe share of a mutual fund scheme that an investor's money is translated into — typically carrying a face value of Rs 10, and worth whatever the scheme's NAV is on the day.
- Dividend Distribution TaxThe tax a mutual fund scheme itself deducted before paying a dividend, abolished from April 2020 — since when the payout has instead been taxed in the investor's own hands at their slab rate.
- Cum-dividend NAVThe NAV after a dividend has been announced but before it is paid out.
- Deferment of taxesThe advantage of the growth option — since the scheme itself is tax-exempt and capital gains are realised only when booked, gains compound before tax until the investor chooses to sell.
- Ex-dividend NAVThe NAV after a dividend has been paid out, reduced by the amount distributed.
- Dividend Transfer PlanA facility that invests the IDCW earned in one scheme into another scheme of the same mutual fund, on the next business day after the record date.
- Stamp duty on units0.005% of the amount invested on every purchase-side inflow since 1 July 2020 — lump sum, additional purchase, SIP, STP, DTP, switch-in and dividend reinvestment, for both SoA and demat units — and 0.015% on transfer of…
- Assets under ManagementThe total value of the money a scheme or a fund house manages — the current NAV multiplied by units outstanding — and the base on which the expense ratio is charged.
- Key Information MemorandumThe short summary of the SID and SAI that SEBI requires to accompany every mutual fund application form — the one scheme document an investor is guaranteed to be handed.
- Consolidated Account StatementA single statement showing an investor's transactions and holdings across every scheme of every mutual fund in India, linked by PAN and issued monthly where there has been a transaction.
- Total Return IndexThe variant of a market index that adds the dividends and interest paid by its constituents to their price movement — the only variant a mutual fund scheme may be benchmarked against since 1 February 2018.