Lesson 5 of 8 · Reading a Scheme Before You Invest

Growth and IDCW Options: How Each Works

A scheme usually offers a growth option and an IDCW option. This lesson explains what happens to the scheme's earnings under each, why an IDCW payout lowers the NAV, and how each option is taxed (rates as of October 2026).

Fact-checked 8 October 20263 practice questions in the game

Two options, one portfolio

A scheme usually offers two options, growth and IDCW (Income Distribution cum Capital Withdrawal). Both draw on the same portfolio. They differ in what happens to the income and gains the scheme earns.

In the growth option nothing is paid out. Whatever the scheme earns stays invested and shows in the option's NAV, which can also fall when markets fall. The investor receives money only by redeeming units.

How an IDCW payout works

In the IDCW option the scheme may pay out part of its value from time to time. A payout is not assured, either in amount or in timing. When one is declared, it is paid within 7 working days of the record date.

The NAV of the IDCW option falls by the amount paid. A payout therefore comes out of the investor's own holding and is not an extra return on top of it: the payout and the lower value of the units together equal what the units were worth before. The words capital withdrawal in the option's name point to the same thing.

Where a payout is reinvested in the scheme instead of being paid out, the reinvestment is a purchase and bears stamp duty of 0.005%; the units so allotted do not attract exit load.

How each option is taxed

As of October 2026, an IDCW payout is taxed in the investor's hands at the slab rate each time it is paid. For a resident, tax is deducted at source at 10% when the amount from a fund house exceeds ₹10,000 in a year, under section 393 of the Income-tax Act, 2025 (Section 194K of the old 1961 Act). The rate is 20% for non-residents, and 20% where PAN is not furnished.

In the growth option tax arises only when units are redeemed or switched out, on the capital gain realised. A rise in NAV that has not been realised is not taxed. The rate then depends on the type of fund and how long the units were held.

Rules at a glance

IDCW payoutWithin 7 working days of the record date; interest at 15% a year for delay, borne by the AMCSEBI Master Circular for Mutual Funds, 20 March 2026

Tax on IDCWTaxed in the investor's hands at slab rateIncome-tax Act, 2025; as of October 2026

Tax deducted at source, residents10% when the amount from a fund house exceeds ₹10,000 in a yearSection 393 (old Section 194K); the threshold was ₹5,000 until 31 March 2025

Tax deducted at source, other cases20% for non-residents; 20% where PAN is not furnishedSection 393 (old Section 196A); section 397 (old Section 206AA)

Growth optionTax arises only on redemption or switch-out, as a capital gainIncome-tax Act, 2025; as of October 2026

Reinvested IDCWStamp duty of 0.005% on the reinvestment; no exit load on the units allottedIndian Stamp Act, 1899; SEBI Master Circular for Mutual Funds

Worked example

An IDCW payout and the NAV (illustrative; tax ignored)

An investor holds 2,000 units in the IDCW option of a scheme at a NAV of ₹25. The holding is worth 2,000 × 25 = ₹50,000.
The scheme pays an IDCW of ₹1.50 a unit and nothing else changes. Payout = 2,000 × 1.50 = ₹3,000.
The NAV falls by the amount paid: 25 − 1.50 = ₹23.50.
Value of the units afterwards = 2,000 × 23.50 = ₹47,000.
Payout plus units = 3,000 + 47,000 = ₹50,000, the same as before.

Result. The investor has ₹3,000 in hand and units worth ₹47,000. Nothing has been added by the payout, and the ₹3,000 is taxable at the investor's slab rate.

Key points

Growth option: no payouts; income and gains stay in the NAV until units are redeemed.
IDCW option: payouts are not assured, and the NAV falls by the amount paid out, so a payout is not an extra return.
An IDCW payout is made within 7 working days of the record date.
IDCW is taxed at the investor's slab rate, with 10% tax deducted at source for residents above ₹10,000 a year from a fund house.
Growth-option gains are taxed as capital gains, and only when units are redeemed or switched out.

Common misunderstandings

An IDCW payout is not an extra return: the NAV falls by the amount paid, so it comes out of the investor's own holding.
IDCW is not a fixed or assured income: the scheme may or may not pay, and the amount can vary.
A rise in the growth option's NAV is not taxed as it happens: tax arises only when units are redeemed or switched out.

Questions people ask

Do the growth and IDCW options hold different securities?

No. They are options of the same scheme and draw on the same portfolio. They differ in whether part of the value is paid out.

When is tax deducted at source on an IDCW payout?

For a resident, at 10% when the amount from a fund house exceeds ₹10,000 in a year (as of October 2026). The payout is still taxed at the investor's slab rate, and the tax deducted is set against that liability.

Is a switch out of the growth option taxed?

Yes. A switch out is a redemption, so any capital gain realised on the units is taxable.

What this lesson relies on

SEBI Master Circular for Mutual Funds, 20 March 2026 (IDCW payout timeline; exit load)
Income-tax Act, 2025: section 393 (tax deducted at source on income from units) and section 397 (higher rate where PAN is not furnished)
Indian Stamp Act, 1899, as amended by the Finance Act, 2019 (stamp duty on mutual fund units from 1 July 2020)

This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.