Every scheme is sold in two options, and the difference is not what the names suggest. Growth accumulates everything inside the NAV. IDCW — Income Distribution cum Capital Withdrawal — periodically pays some of it out.
SEBI renamed this option from “Dividend” in 2021, and the new name is doing real work. It says out loud what the old one hid: part of what you are being paid back is your own capital.
The payout is not income
This is the whole guide, so it is worth being blunt about the arithmetic.
Say you hold 1,000 units at a NAV of ₹50 — a corpus of ₹50,000. The scheme declares an IDCW of ₹5 per unit. You receive ₹5,000 in your bank account, and the NAV drops to ₹45. Your holding is now worth ₹45,000.
₹45,000 plus ₹5,000 is ₹50,000. You are exactly where you started.
Nothing was created. The scheme moved ₹5,000 from one pocket of yours to another and charged you tax for the privilege. A company dividend comes out of the company’s earnings; an IDCW comes out of your own NAV, and the fall is not incidental — it is mandatory, and it is why the NAV chart of an IDCW plan has visible steps down in it that have nothing to do with markets.
The tax is the decisive part
Since April 2020, IDCW is added to your income and taxed at your slab rate — up to 30% plus surcharge and cess. TDS is deducted at source once distributions from a fund house cross the annual threshold.
Compare that with the Growth option, where nothing is taxed until you sell, and then it is taxed as a capital gain: for an equity-oriented fund held a year or more, 12.5% above a ₹1,25,000 annual exemption.
For anyone in the 20% or 30% bracket, that is not a close call. You can replicate an IDCW exactly — sell some units whenever you want cash — and pay capital-gains rates on only the gain portion instead of slab rates on the whole payout. That is what a SWP does, and it is strictly better on tax for almost everyone.
Three more things that make IDCW worse than it looks
- It is not a yield and it is not promised. A fund can only distribute out of realised gains and distributable surplus. In a bad year there may be no distribution at all, which is precisely when someone relying on it needs one.
- The amount and timing are the AMC’s decision, not yours. A SWP lets you choose ₹20,000 on the 5th. IDCW gives you whatever is declared, whenever it is declared.
- It interrupts compounding. Money paid out is money no longer invested. Over a long holding period that is the largest cost of the three, and the one that never shows up on a statement.
The IDCW Reinvestment trap
There is a third variant: IDCW with reinvestment, where the payout is automatically used to buy more units.
This is the worst of every world. You are taxed at slab rates on a distribution you never received, the reinvested units start a fresh holding period for capital-gains purposes, and the end result is arithmetically almost identical to just holding Growth. It exists mostly for historical reasons. If you are in it, you are paying tax for a NAV movement that nets to nothing.
When IDCW is defensible
Rarely, and the case is behavioural rather than financial: someone who will spend a payout but would not have the discipline to place a redemption request, and who is in the 0% or 5% bracket so the slab-rate penalty is small or absent.
For everyone else the answer is Growth, plus a SWP if you need the cash flow.
Checking which one you hold
The option is part of the scheme name, and this site treats Growth and IDCW as separate rows because they are separate schemes with separate NAV histories. Comparing an IDCW plan’s NAV chart against a Growth plan’s without noticing is a reliable way to conclude that a perfectly good fund has gone nowhere for a decade — every step down is a payout, not a loss. The glossary entry for Growth vs IDCW has the short version, and how funds are taxed has the full tax picture.
Key takeaway
An IDCW payout is your own capital handed back, with the NAV cut by exactly the amount distributed, and then taxed at your slab rate. Growth defers tax until you sell and is then taxed as a capital gain. For almost everyone the answer is Growth, with a SWP if you need the cash flow — same money, far better tax.
Terms used here
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