Growth and IDCW options
Two ways a mutual fund scheme treats its gains: keep them in the unit price, or pay part of them out
Rules as on 12 October 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room: a scheme pays ₹1 a unit to its IDCW investors today. Are those investors ₹1 a unit richer tonight than the growth investors? Take a show of hands and come back to it on slide 4.
A payout from a mutual fund is not extra money. It comes out of the value of the investor's own units.
Both options of a scheme hold the same portfolio. The growth option leaves the gains in the unit price. The IDCW option pays part of the value out, and the unit price falls by what is paid.
Trainer notes
The unit price is the net asset value, or NAV: the scheme's assets minus its liabilities, divided by the number of units. The whole deck rests on one fact: a payout lowers the NAV by the amount paid.
Two options, one portfolio
Growth option
No payouts. Gains and income stay in the scheme and show in the NAV. The investor gets cash by redeeming units.
IDCW option
Income Distribution cum Capital Withdrawal. The scheme may pay out part of its distributable surplus per unit.
Two NAVs
One option pays out and the other does not, so each has its own NAV. The two drift apart with every payout.
Take-away: IDCW is not assured. The trustees decide the amount and the date, and only if there is a surplus to pay.
Source: SEBI Master Circular for Mutual Funds, 20 March 2026, Chapter 12 (IDCW distribution procedure).
Trainer notes
For liquid and debt schemes that pay as often as daily to monthly, the trustees may delegate the decision to officials of the fund house, within a policy the trustees approve. The amount and the timing are still not promised.
What a payout does to NAV and units
THE SET-UP
An investor holds 1,200 units in each option. Assume both NAVs are ₹25, so each holding is worth ₹30,000.
The scheme declares IDCW of ₹1 a unit. Assume markets do not move.
- Growth option: nothing is paid. 1,200 units × ₹25 = ₹30,000.
- IDCW option: payout = 1,200 units × ₹1 = ₹1,200.
- The NAV falls by the payout: ₹25 − ₹1 = ₹24. The units are now worth 1,200 × ₹24 = ₹28,800.
- ₹28,800 in units + ₹1,200 in the bank = ₹30,000, before tax on the ₹1,200.
Result: The payout moved ₹1,200 from the units to the bank account. It did not add to the investor's wealth.
Illustration with assumed figures. In practice the two options of a scheme rarely have the same NAV.
Trainer notes
This answers the opening question: nobody is richer. The number of units does not change in a payout; only the NAV does. SEBI requires the notice of an IDCW to say that the NAV will fall to the extent of the payout and any statutory levy.
Why 'dividend' became IDCW
The old name
The option was called 'dividend'. The word suggests a share of profit, as with a company. A fund payout need not be profit.
The change
By a circular of 5 October 2020, SEBI renamed the options with effect from 1 April 2021: IDCW Payout, Reinvestment and Transfer.
The disclosure
Offer documents must say that amounts can be paid out of the investor's capital. The account statement must show the split.
Sources: SEBI Master Circular for Mutual Funds, 20 March 2026, paras 12.1 to 12.3; SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/194 of 5 Oct 2020, paras 4 and 7.
Trainer notes
The statement is the Consolidated Account Statement. It separates 'income distribution', which is appreciation in NAV, from 'capital distribution', which comes from the equalisation reserve. The next slide explains that reserve.
How a payout can be your own capital
Assume a unit with a face value of ₹10 and an NAV of ₹25: ₹9 of realised gains and ₹6 of unrealised gains.
A new investor buys at ₹25
The price includes gains the scheme earned before this investor arrived.
Where the ₹25 is booked
₹10 to unit capital. ₹9, the realised-gains part, to the equalisation reserve. ₹6, the unrealised part, to the unit premium reserve.
What can be paid out
The equalisation reserve counts towards distributable surplus. The unit premium reserve does not.
What follows
A payout soon after can include part of that ₹9. The investor is getting back money they have just put in.
Source: SEBI Master Circular for Mutual Funds, 20 March 2026, paras 12.2 and 12.6.2. The ₹10, ₹9 and ₹6 are assumed figures.
Trainer notes
SEBI's wording: amounts can be distributed out of investors' capital (equalisation reserve), which is the part of the sale price that represents realised gains. Do not go deeper into fund accounting than this.
How payouts are taxed
| The rule | Since | |
|---|---|---|
| Who pays the tax | The investor. The payout is added to income and taxed at slab rates (for individuals). Earlier the scheme paid a dividend distribution tax. | 1 April 2020 |
| Tax deducted at source | 10% for a resident, on the whole IDCW, if it is more than ₹10,000 in a financial year. The limit was ₹5,000 until 31 March 2025. | 1 April 2025 |
| No valid PAN; non-residents | Deduction at 20% in both cases. | |
| Growth option | No tax while the units are held. Capital gains rules apply when units are redeemed. |
Secondary sources: HSBC MF Tax Reckoner 2026-27; Tata Mutual Fund TDS note, 20 Jul 2026; Aditya Birla Sun Life AMC note on dividend distribution tax, 31 Jul 2023.
Trainer notes
The deduction is not the final tax. It is a credit against the tax the investor works out in the return. The deduction rule is in section 393 of the Income-tax Act, 2025 (formerly section 194K for residents). Residents have no tax deducted on redemption.
Three ways to take ₹1,200
| IDCW payout | IDCW reinvestment | Withdrawal from growth | |
|---|---|---|---|
| What happens | ₹1,200 is paid to the bank. NAV falls to ₹24. | ₹1,200 buys 50 new units at ₹24. | 48 units are redeemed at ₹25 to pay ₹1,200. |
| Units held after | 1,200 units at ₹24 = ₹28,800 | 1,250 units at ₹24 = ₹30,000 | 1,152 units at ₹25 = ₹28,800 |
| What is taxed | The whole ₹1,200, as income | The whole ₹1,200, as income | The gain in the 48 units, as a capital gain |
| Who sets it | The trustees: amount and date | The trustees: amount and date | The investor: amount and date |
Take-away: We explain how each route works. Which one fits depends on the person's own needs and tax position.
Same assumed case as slide 4: 1,200 units, NAV ₹25, IDCW ₹1 a unit. Stamp duty on the reinvestment is ignored.
Trainer notes
If the 48 units had cost ₹20 each, the gain is 48 × ₹5 = ₹240, taxed under the capital gains rules for that type of fund. A systematic withdrawal plan (SWP) repeats this each month. A withdrawal uses up units, and it can eat into capital if the NAV falls. Do not present any route as the one to choose.
The figures as they stand
Rules in force on 12 October 2026.
- TAX DEDUCTED AT SOURCE
- 10%Deducted from IDCW paid to a resident investor, once the yearly limit is crossed.
- YEARLY LIMIT
- ₹10,000IDCW from a mutual fund in a financial year. The limit was ₹5,000 until 31 March 2025.
- PAYOUT WITHIN
- 7 daysWorking days from the record date within which the payout must reach the investor.
Sources: HSBC Mutual Fund Tax Reckoner 2026-27; Tata Mutual Fund note on TDS, 20 Jul 2026; SEBI Master Circular for Mutual Funds, 20 March 2026, para 12.4.
Trainer notes
The record date is the day on which the list of unit holders who will get the payout is fixed. The NAV is adjusted at the close of business on that day. Late payment attracts interest at 15% a year, borne by the fund house. Units bought through reinvestment carry stamp duty of 0.005%, like any other purchase.
If you learnt this from older material
What older material says
- The option is called 'dividend'
- The scheme pays dividend distribution tax before paying the investor
- Tax is deducted at source above ₹5,000 a year
- A dividend is paid out of the scheme's profit
What holds now
- IDCW: the name since 1 April 2021
- No distribution tax since 1 April 2020; the investor pays at slab rate
- Tax is deducted at source above ₹10,000 a year, since 1 April 2025
- A payout can include the investor's own capital; the statement shows it
Sources: SEBI Master Circular, 20 Mar 2026, Ch. 12; HSBC Tax Reckoner 2026-27; Tata Mutual Fund TDS note, 20 Jul 2026; Aditya Birla Sun Life AMC note, 31 Jul 2023.
Trainer notes
The ₹5,000 limit applied from 1 April 2020 to 31 March 2025. Material written before April 2020 will also compare options on the basis of the old distribution tax; ignore those comparisons.
Four things people get wrong
Misconception'IDCW is income on top of my units.'
What is trueIt comes out of the units. The NAV falls by the amount paid.
Misconception'A monthly payout is a fixed income.'
What is trueThe amount and the timing are not assured. A scheme can pay less, or skip a payout, if there is no surplus.
Misconception'Buy just before the record date.'
What is trueThe buyer gets the payout and an NAV that is lower by the same amount, and the payout is taxable.
Misconception'Reinvested IDCW is not taxed.'
What is trueIt is taxed as income in the same way as a payout, although no cash reaches the bank.
Trainer notes
On the third point: SEBI bars trustees, fund houses and distributors from saying when a payout is likely before the public notice. Never use an expected payout to sell a scheme.
Check yourself
Question 1: An investor holds 2,000 IDCW units at an NAV of ₹40. The scheme pays ₹2 a unit and markets do not move. What are the payout, the new NAV and the value of the units?
Answer: Payout 2,000 × ₹2 = ₹4,000. New NAV ₹40 − ₹2 = ₹38. Units worth 2,000 × ₹38 = ₹76,000. Total ₹80,000, the same as before, before tax.Question 2: Why did SEBI replace the word 'dividend' with IDCW, and from what date?
Answer: Because a payout can come partly out of the investor's own capital (the equalisation reserve), not only from income. The new names applied from 1 April 2021, under SEBI's circular of 5 October 2020.Question 3: A resident investor receives IDCW of ₹14,000 from one fund house in a year. Is tax deducted at source, and is that the final tax?
Answer: Yes, at 10%, because the amount is above ₹10,000. Deduction is on the whole amount: ₹1,400. It is not the final tax; the payout is taxed at the investor's slab rate and the deduction is a credit.
Sources and disclaimer
Sources for the figures in this explainer
- Option names, capital (equalisation reserve) disclosure, statement split, NAV fall, 7 working days, unit premium reserve: SEBI Master Circular for Mutual Funds, 20 March 2026, Chapter 12.
- Renaming from 1 April 2021: SEBI circular SEBI/HO/IMD/DF3/CIR/P/2020/194 of 5 October 2020, para 7.
- Tax deducted at source (10% on the whole amount above ₹10,000; 20% without PAN): Income-tax Act, 2025, sections 393 and 397, as reproduced by TaxHeal; HSBC reckoner. Limit raised from ₹5,000 on 1 April 2025: Tata Mutual Fund note, 20 Jul 2026.
- Distribution tax ended 1 April 2020; payouts taxed at slab rate: Aditya Birla Sun Life AMC note, 31 Jul 2023.
- Stamp duty, late-payment interest, tax on withdrawals: Trustner Academy verified fact sheet, 7 Oct 2026.
- The tax sources are secondary. All unit, NAV and payout figures in the examples are assumed.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).