Summary of this article
IDCW plans distribute mutual fund profits as regular payouts.
Payouts are taxed according to your income slab rate.
Growth options reinvest profits, offering better long-term wealth compounding.
The mutual fund industry in India is witnessing a rise in investor awareness and a budding culture of financialising savings. As of July 2026, the total Assets Under Management (AUM) of the Indian mutual fund industry hit Rs 85.76 lakh crore.
Amid the surge in investor participation seen in the past few years, investors are moving away from the traditional Income Distribution cum Capital Withdrawal (IDCW) (formerly called dividend option plans) in favour of growth option plans. As market dynamics evolve and tax structures shift, it is crucial for investors to understand the fundamental differences between IDCW and the growth option to make informed choices.
How Do IDCW Plans Work
When an investor invests in a scheme, the fund house generates returns through dividends from underlying stocks, interest from bonds, or capital gains from selling securities at a profit.
However, if an investor opts for the IDCW option, the mutual fund house distributes a portion of the accumulated profits back to the retail investor at periodic intervals. Thus, the payout the investor receives is a withdrawal from their own invested capital and accumulated profits. Ultimately, each time a payout is made, the Net Asset Value (NAV) of the fund drops by the exact amount of the dividend distributed.
Taxation of IDCW Plans
Notably, IDCW plans have declined in popularity among investors. One of the likely reasons behind this is a change in taxation norms. Prior to 2020, dividends were subject to a Dividend Distribution Tax paid directly by the fund house, making them tax-free in the hands of the investor.
However, the Finance Act of 2020 changed this and payouts received under the IDCW option are now added to the investor’s total income and taxed according to their applicable income tax slab rate. Additionally, if the IDCW payout exceeds Rs 5,000 in a financial year, a 10 per cent Tax Deducted at Source (TDS) is levied. Thus, these tax norms make IDCW plans less appealing for retail investors in higher tax brackets.
However, despite the bend towards growth option plans, some investors continue to invest in IDCW plans. These investors typically include retirees, senior citizens, and conservative investors who rely on a periodic cash flow to meet their day-to-day expenses.
IDCW vs Growth Option
The main difference between IDCW is about how surplus profits are distributed to investors. The growth option reinvests the surplus, while the IDCW redistributes the surplus. Conversely, the compounding effect in IDCW is significantly lower because periodic withdrawals constantly reduce the base capital.
IDCW payouts are taxed immediately at the investor's applicable income tax slab rate whenever a payout is received. On the other hand, investments in the growth option only attract Short Term or Long Term Capital Gains tax at the time of final redemption, allowing the capital to grow without regular tax leakage.
Types of IDCW Plans
Mutual fund houses typically offer three variants of IDCW. The first option is the IDCW Payout option. This is the standard version where the fund declares a distribution and the cash is directly credited to your registered bank account, providing immediate liquidity.
The second option is the IDCW Reinvestment option. Instead of paying out the cash to the investor’s bank account, the declared dividend is used to purchase additional units of the same mutual fund at the revised, post-dividend NAV. While this increases your total unit balance, it does not provide immediate cash in hand. It functions somewhat like the growth option but still has the same tax rules as the IDCW structure.
The third variant is the IDCW Transfer Plan, under which the dividend declared in one source scheme is automatically swept and invested into another target scheme managed by the same fund house.
Knowing how IDCW and growth options work gives investors the ability to make informed choices and choose a plan which aligns with their overall investment goals. While the growth option is preferred by investors for long-term wealth accumulation and tax optimisation, the IDCW plan still serves a distinct purpose for those who prioritise a steady flow of money.
