Dividend Option of Mutual Funds Renamed to ‘Income Distribution cum Capital Withdrawal’ option

SEBI has directed all mutual funds and AMCs to rename the dividend payout option in mutual funds schemes to the Payout of Income Distribution cum Capital Withdrawal option or the IDCW option. The circular announcing the change – link or download here.

That is:

Dividend (old name) – renamed to -> Income Distribution cum Capital Withdrawal (IDCW) (new name)

But since the dividend option in MF also comes in various versions, here is the detailed renaming of all the existing and proposed schemes’ dividend option of mutual funds:

  • Dividend Payout – Renamed to Payout of Income Distribution cum capital withdrawal option, or the IDCW-Payout option.
  • Dividend Re-investment – Renamed to Reinvestment of Income Distribution cum capital withdrawal option, or the IDCW-Reinvestment option.
  • Dividend Transfer Plan – Renamed to Transfer of Income Distribution cum capital withdrawal plan or the Transfer of IDCW option.

The changes shall be effective from 1st April 2021.

You may wonder why has SEBI decided to rename the dividend option of all the mutual fund schemes in India?

SEBI felt that there was an urgent need to transparently communicate to the investor that a certain portion of the capital (equalization reserve or distributable reserve) can be distributed as a dividend under such option of a mutual fund scheme. Or more simply, that such dividend income stream coming from MFs may also include a part of the invested capital.

In past, there had been several incidents of misselling of dividend plans by agents and distributors. The dividend option of many schemes were (wrongly) sold on the promise of a guaranteed payout of regular dividend. As a result of this misselling, many investors bought such schemes for getting a dividend income but they never realized or understood eventually, it is paid from their capital only to an extent.

By the way, for now, it’s just about the change of name: i.e., just renaming the dividend option of mutual funds.

There will be no change in payout or taxation for now. But it will be interesting to see how the MFs will eventually decide to provide a segregation of the split between income and principal and how it is treated separately from a taxation angle. I guess that taxation of dividend option of MFs (now called Payout of Income Distribution cum capital withdrawal or IDCW option) might be revisited very soon.

(Read How mutual funds are taxed in India?)

But for now, it’s just a change of name from the dividend option to the Payout of Income Distribution cum capital withdrawal (IDCW) option for mutual funds in India.

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