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IDCW in Mutual Funds: Meaning, Types, Tax & Growth Comparison

IDCW in Mutual Funds: Meaning, Types, Tax & Growth Comparison

Amit Kachroo•January 3, 2026•4 mins

When investing in mutual funds, returns are not just about how much your investment grows, but also about how and when you get returns. One such option that remains unclear for many investors is IDCW in mutual funds. Previously called the dividend option, IDCW possesses a unique structure, tax impact, and growth implications every investor must take note of prior to making a decision.

This guide will tell you what IDCW is, the different types, how it is treated in taxation and how it compares with other growth plans.

What Is IDCW in Mutual Funds?

IDCW refers to Income Distribution cum Capital Withdrawal. In simple terms, it is a form of mutual fund where the investors may receive periodic payments from the fund's surplus. Such payouts are not fixed and are solely dependent on the performance of the fund and at the will of the fund house.

In contrast to fixed-income products, IDCW does not guarantee a frequent income. A certified financial consultant highlights that these payouts are not extra income but rather a draw of your invested funds or profits.

How IDCW Works

In an IDCW option, the Net Asset Value (NAV) of the mutual fund reduces whenever a payout is made. This means that as you receive money, the total value of your investment decreases by the same value.

An experienced financial planner usually describes it as a good investment option where the cash flow is not required regularly, but instead on an intermittent basis.

Types of IDCW Options in Mutual Funds

IDCW options are not one-size-fits-all. They are designed to meet various income requirements and risks. A certified financial planner usually categorizes them into the following types:

IDCW Payout Option

The declared value gets added directly to your bank account in this option. It is appropriate for investors who require periodic liquidity.

IDCW Reinvestment Option

In this option, the payout is automatically invested back into the mutual fund, which increases the number of units. This option maintains market exposure while allowing distributions.

IDCW Transfer Option

This payout is allocated to another scheme, mostly as a debt fund, offering superior flexibility for balancing the portfolio. This can be suggested to use as a strategic allocation of assets by a mutual fund investment planner.

Taxation of IDCW in Mutual Funds

One of the most vital things about IDCW that investors do not pay much attention to is taxation. To save surprises in the future, it is possible to hire a tax consultant.

  • IDCW payouts will be taxed according to your income tax rate.
  • The mutual fund deducts TDS at 10% if IDCW income exceeds ₹5,000 in a financial year
  • The income of IDCW will have to be claimed as part of the income from other sources.

IDCW vs Growth Option: Key Differences

The decision on whether to use IDCW or Growth is a strategic choice. They are frequently compared by a SIP investment planner on the following parameters:

Payouts

Periodic (not guaranteed)

No payouts

NAV Impact

NAV reduces after payout

NAV grows over time

Tax Efficiency

Lower (taxed yearly)

Higher (taxed on redemption)

Wealth Creation

Limited compounding

Strong compounding

Growth options tend to work better in the long run than IDCW because of the power of compounding, when they are combined with a disciplined SIP strategy suggested by the best SIP planner.

Who Should Choose IDCW?

Although IDCW is not suitable for everyone, a knowledgeable financial advisor can recommend it to you, in case you:

  • Need periodic cash flow
  • Are retired or semi-retired
  • Give income more preference than long-term growth.
  • Have lower tax liability

However, growth plans tend to be more reasonable to young investors or other long-term oriented investors, such as retirement or the education of children.

IDCW and SIP: A Smart or Risky Combination?

Although SIPs are normally linked with growth plans, some investors choose SIPs in IDCW schemes. A SIP investment planner might warn that the more frequent the payouts, the weaker the rupee cost averaging and long-term compounding.

To achieve the creation of wealth, SIPs combined with growth options tend to provide better outcomes.

Conclusion

IDCW in mutual funds offers flexibility and liquidity but comes with trade-offs in taxation and growth potential. By hiring a financial advisor, you can understand these subtleties prior to investing. The decision to use IDCW or growth would be determined by your financial objectives, income requirements, and your tax bracket.

Having a financial planner will help you make sure that your mutual fund options are in line with your long-term plan, not simply one that is convenient at the time.