Income distribution & capital withdrawal (IDCW) in Mutual Funds is a change that was enacted by SEBI through the circular no. SEBI/HO/IMD/DF3/CIR/P/2020/194. It came into force on the 1st of April, 2021. As per the change, Dividend Plan of a Mutual Fund scheme will henceforth be known as ‘Income Distribution cum Capital Withdrawal Plan’ or IDCW Plans.


Why Was The Change Enacted?

Note- Profits earned in a mutual fund scheme could either be distributed immediately or could be given as appreciation by the fund houses. The profits distributed are termed as dividends. If the dividend money is reinvested, then it is called growth.

As per the change, SEBI instructed the Asset Management companies(AMCs) to clearly segregate and disclose (i) Income distribution (appreciation in NAV) and (ii) Capital distribution (Equalisation Reserve) in the Consolidated Account Statement (CAS) provided to the investors.

As a result, there were few changes made with regards to the nomenclature. Here are the revised nomenclature changes-
 

Option/Plan (Existing) New Nomenclature
Dividend payout Payout of Income Distribution cum capital withdrawal option
Divident reinvestment Reinvestment of Income Distribution cum capital withdrawal option
 
Dividend Transfer Plan Transfer of Income Distribution cum capital withdrawal plan

 

How Can An Investor Benefit From This?

Under Dividend Option of a Mutual Fund Scheme, certain portion of the capital (Equalization Reserve) will be distributed as dividend. Further every time the dividends are declared, the Net asset value of the fund would go down proportionately, as the dividends are being distributed from it. The nomenclature change will help an individual understand if the dividends are being paid out of the capital apreciation or the capital invested (View the illustration below to understand better)-  

Record Date 30-Apr-21
Dividend Rate 7
Cum NAV on record Date 20
Total Units 1,823.67
Total Dividend 12,765.70
Dividend out of capital 5,821.26
Dividend out of appreciation 6,944.44

 

Investor 1:

Calculation for record date 30 April, 2021
Date Amount Invested Subscription NAV (A) Subscription Units Movement in NAV from the date of investment to record date Dividend declaration Rate to pay dividend (per unit) (B) Capital utilised Dividend paid out of appreciation in NAV (per unit) Dividend amount paid out of capital (INR)
23-Jan-21 10,000.00 12 833.33 8 7 0 7 0.00 5,833.33
05-Feb-21 10,000.00 18 555.56 2 7 5 2 2,777.78 1,111.11
25-Apr-21 10,000.00 23 434.78 0 7 7 0 3,043.48 0.00
      1,823.67         5,821.26 6,944.44

 


PS: For the purpose of the above calculations, in case if capital is utilised to pay dividend, subscription NAV would be adjusted only for those dividends declared on or after Apr 1, 2021 and no such adjustments would be done for dividends declared prior to Apr 1, 2021

After each distribution, the capital amount at the unitholder level be adjusted (A-B) in order to arrive at a correct bifurcation for the next distribution as shown below:

Record Date 30-May-21
Dividend Rate 5
Cum NAV on record Date 15
Total Units 1,823.67
Total Dividend 11,137.82
Dividend out of capital 7,099.36
Dividend out of appreciation 4,038.46

 

Investor 1:

Calculation for record date 31 May, 2021
Date Amount Invested Adjusted Subscription NAV Subscription Units in the form of NFO purchase/Switch/Div Reinvestment/Dividend Transfer Movement in NAV from the date of investment to record date Dividend declaration Rate Capital utilised to pay dividend (per unit) (B) Dividend paid out of appreciation in NAV (per unit) Dividend amount paid out of capital (INR) Dividend amount paid out of appreciation (INR)
23-Jan-21 10,000.00 12 (12-0) 833.33 3 5

2

 3 1,666.67 2,500.00
05-Feb-21 10,000.00 13 (18-5) 555.56 2 5 3 2 2,307.69 1,538.46
25-Apr-21 10,000.00 16 (23-7) 434.78 -1 5 5 0 3,125.00 0.00
      1,823.67         7,099.36 4,038.46

 

  • NAV at which the investor subscribes to the fund will be considered as his cost of capital for the purpose of this disclosure. In case of multiple purchases, subscription NAV for each transaction would be considered as Capital for that respective lot.
  • At the time of each distribution, the ex-date cum dividend NAV (i.e. the NAV on the record date) would be compared with the capital contribution (as mentioned in point i) at each unitholder level and open lot level.
  • The difference between the cum dividend NAV and the capital mentioned in point (i), if positive will be considered as income i.e. distributed from the appreciation in NAV. In case if the difference is negative, everything would be considered as capital distribution i.e. distributed from equalization reserve.
  • Any balance amount distributed will be considered as capital i.e. distributed from equalization reserve.
  • After each distribution, the capital amount at the unitholder level be adjusted (i.e. reduced by the portion disclosed as distributed from the equalization reserve as mentioned in point iv) in order to arrive at a correct bifurcation for the next distribution.

Will The Rule Affect A Person’s Taxation?

Dividends or the income distributed by a mutual fund house will continue to be taxed in the hands of investors as per applicable tax rates. If the income distribution is above Rs.5000, then the tax deducted will be at the rate of 10%. Also, the capital gain/Loss rules and its taxation will remain the same. ​​​​

Summary-

IDCW plans to take some of your capital that was already yours and distribute it to you. Through this, SEBI wants the fund houses to provide clarity to the investors. If you are expecting regular returns from Mutual Funds, it would be favorable to invest in suitable schemes after completing a throrough risk profile analysis. After allowing the funds to grow for a minimum period of 3-5 years, the funds can be withdrawn through an STP (systematic withdrawal plan). 

 

Source-

https://www.amfiindia.com/investor-corner/knowledge-center/FAQs.html