The IDCW option allows investors to receive periodic payouts from a mutual fund, which may be generated from dividends or the sale of securities. Since payouts depend on available surplus, they aren’t fixed, and the fund’s net asset value (NAV) falls in proportion to the amount distributed.
The IDCW facility in the Parag Parikh Flexi Cap Fund will commence on 31 October 2025.
Under the IDCW, there will be two options: 1) payout and 2) reinvestment.
For existing investors, the default option will be ‘Growth’, where the payouts are not distributed and are reinvested. While new investors can directly choose the IDCW option, existing investors must exit and reinvest to switch, thereby triggering capital gains tax.
“This is for senior citizens, retirees as well as unitholders whose total income doesn’t exceed ₹12 lakh or are in the lower tax brackets of 5% and 10%,” said Raj Mehta, executive vice president and fund manager-equity at PPFAS Asset Management Pvt. Ltd.
“This came about due to the recent announcements on tax slabs from the finance ministry. Total income up to ₹4 lakh is exempt, and for income between ₹ 4 lakh and ₹12 lakh, you must claim a rebate under Section 87A, which is allowed only on normal income (including dividends but excluding capital gains). To bridge this gap, we are just offering this as an additional feature in the plan. Existing investors need not take any action regarding their investments. For incremental investments, they can choose this option if they deem it fit.”
There will be no change to the investment philosophy and how the fund is managed, he added.
How it works
Under the new tax regime, if an investor has an annual income of up to ₹12 lakh, they are exempt from paying any tax, as announced in the 2025 budget.
Even though tax is levied on income above the ₹4 lakh basic exemption limit, individuals with taxable income of up to ₹12 lakh can claim a rebate under Section 87A, effectively reducing their tax outgo to zero.
On the other hand, capital gains arising from equity mutual funds and stocks are taxed at 12.5% if sold after a 12-month holding period or 20% if sold within a year, regardless of the income level. However, IDCW payouts are taxed as normal income under the slab rate and can therefore benefit some sections of investors.
Let’s say person A has a salary income of ₹11 lakh per annum and an MF portfolio of ₹10 lakh that yields a 10% return every year. Assuming he opts for the growth plan, his portfolio value will be ₹16.5 lakh after five years. If he decides to sell his investments after five years, he will have to pay ₹65,600 as a 12.5% LTCG tax on the ₹6.5 lakh capital gain. For context, capital gains up to ₹ ₹1.25 lakh in a year are tax-exempt.
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Save tax using IDCW
The person can save on tax if they choose the IDCW option, as their total yearly income, including the IDCW payout, is below ₹12 lakh.
This is how the math works if he’d chosen the reinvestment option. Let’s assume the MF he was investing in distributed 5% as IDCW payouts every year (half the yearly portfolio growth of 10%). In that case, he would receive ₹50,000 as a tax-free payout each year, as his total income remains below the taxable limit of ₹12 lakh. As he has chosen the reinvestment plan, ₹50,000 every year will be used to purchase additional units under the same scheme.
After five years, when he goes to withdraw his investments, he will get a capital gain of only ₹4 lakh vs ₹6.5 lakh (in the growth plan). Recall that in the growth plan, the payout was not distributed and was added to the investment value, whereas the investor received ₹50,000 every year in the IDCW plan, and the proceeds were then reinvested in the same scheme.
Hence, the capital gains after five years would amount to ₹34,000, after adjusting for the ₹1.25 lakh exemption on capital gains.
If Mr A had chosen the IDCW payout option, he would have received ₹50,000 without paying any tax, since his total taxable income for the entire year would still be below ₹12 lakh.
Nitesh Buddhudev, a Mumbai-based chartered accountant, said the IDCW payout option is suitable for senior citizens who have low or negligible income, as they can enjoy lower taxation from using the slab rate for tax calculation instead of withdrawing through a systematic withdrawal plan, in which case capital gains tax is applicable regardless of the income.
However, he warned that the payout is not fixed and may only supplement a withdrawal plan, rather than fully replacing an SWP strategy.
Abhishek Kumar, a registered investment adviser and founder of Sahaj Money, said that if annual dividends exceed ₹10,000, tax is deducted at source, even if the income is below ₹12 lakh. To avoid this, he said investors can submit Form 15G/15H to the AMC.
Ashish Karundia, a Delhi-based chartered accountant, said the IDCW payout options provide a tax-efficient way for senior citizens with no active income to withdraw money tax-free up to ₹12 lakh. However, he cautioned people against using this as a tax hack, as the IDCW payout amount is unpredictable and can exceed ₹12 lakh in some years.
Note: It is advised that you consult a qualified tax expert before selecting the most suitable option for your needs. Numbers used above are for illustrative purposes.
