Growth Option vs IDCW Option in Mutual Funds - Which Makes More Sense

A common question in our Belong WhatsApp community: "I see Growth and IDCW options when investing. What's the difference, and which should I pick?"

The short answer: Growth option wins for most investors. The math isn't even close.

Here's a quick example. You invest Rs 10 lakh in a mutual fund that grows 12% annually. After one year, it's worth Rs 11.2 lakh.

With Growth option: Your Rs 2 lakh gain stays invested. No tax until you sell.

With IDCW option: The fund pays out that Rs 2 lakh as "dividend." You receive Rs 1.6 lakh after 20% TDS deduction. Your investment value drops to Rs 10 lakh. Next year, you're compounding on Rs 10 lakh, not Rs 12 lakh.

Over 10-15 years, this difference compounds into lakhs of rupees. Yet many NRIs still choose IDCW without understanding what they're giving up.

At Belong, we've helped hundreds of NRIs structure their mutual fund investments correctly. This guide explains exactly how both options work, when each makes sense, and why there's usually a better alternative to IDCW for generating regular income.

What Exactly Is the Growth Option?

The Growth option is straightforward: all profits stay invested in the fund. You don't receive any payouts during your holding period.

When the fund earns through dividends from stocks it holds, interest from bonds, or capital gains from selling securities, everything gets reinvested. This increases the fund's Net Asset Value (NAV) over time.

How It Works:

You invest Rs 1 lakh in a fund at NAV of Rs 100. You get 1,000 units.

After one year, the fund has earned profits. The NAV rises to Rs 112. Your 1,000 units are now worth Rs 1.12 lakh.

You've made Rs 12,000 in paper gains, but you haven't received any cash. That Rs 12,000 stays in the fund, and next year's returns compound on the higher base.

Key Features:

• No regular payouts
• NAV rises as profits accumulate
• Compounding happens automatically
• Tax applies only when you redeem units
• Number of units remains constant (unless you buy more)

The power of compounding makes Growth the default choice for long-term wealth creation. A Rs 10 lakh investment growing at 12% becomes Rs 31 lakh in 10 years when profits stay reinvested. If you withdrew profits annually, you'd end up with significantly less.

👉 Tip: For any investment goal more than 3-5 years away, the Growth option almost always makes more sense. Let compounding do the heavy lifting.

What Is the IDCW Option?

IDCW stands for Income Distribution cum Capital Withdrawal. Until April 2021, this was called the "Dividend Option." SEBI mandated the name change to clarify what actually happens with these payouts.

The old "dividend" terminology was misleading. When a company pays dividends, it's distributing profits from its business. When a mutual fund pays "dividends," it's essentially returning your own money to you, reducing your investment's NAV in the process.

How IDCW Works:

You invest Rs 1 lakh in a fund at NAV of Rs 100. You get 1,000 units.

The fund declares an IDCW payout of Rs 10 per unit. You receive Rs 10,000 in your bank account.

But here's what happens next: The fund's NAV drops from Rs 100 to Rs 90. Your 1,000 units are now worth Rs 90,000. Your investment value is Rs 90,000 + Rs 10,000 received = Rs 1 lakh.

You haven't actually "earned" anything extra. The fund simply moved money from your investment to your bank account, minus taxes.

IDCW Payout Options:

Key Features:

• Periodic payouts (monthly, quarterly, annually)
• NAV falls after each payout
• Payouts are not guaranteed or fixed
• Amount depends on fund's distributable surplus
• TDS deducted before payout reaches you

(SEBI Circular on IDCW Nomenclature)

Why Did SEBI Rename Dividend to IDCW?

SEBI changed the nomenclature in April 2021 because investors were confused. Many believed mutual fund "dividends" worked like stock dividends, representing extra income from the fund's performance.

In reality, mutual fund "dividends" could include:

• Profits from selling securities
• Dividends received from stocks held
• Interest earned on bonds
• And crucially: a portion of your own invested capital

The name "Income Distribution cum Capital Withdrawal" accurately describes this. Part of the payout might be income, but part might simply be your own money being returned to you.

This is why NAV falls after an IDCW payout. The fund isn't generating magical returns. It's moving assets from the scheme to your bank account.

Many investors chose the "dividend" option thinking they'd receive income while their capital remained intact. SEBI's renaming was meant to end this misconception.

👉 Tip: Don't think of IDCW as "free income." It's your own money being returned, with taxes deducted. The Growth option lets your full investment keep working for you.

The Taxation Difference: Why It Matters for NRIs

Taxation is where Growth and IDCW diverge dramatically, especially for NRIs.

IDCW Taxation:

IDCW payouts are treated as "Income from Other Sources." They're added to your total income and taxed at your applicable slab rate. (Income Tax Department)

For NRIs, the fund house deducts 20% TDS before paying you the IDCW amount. (Section 196A of Income Tax Act)

Example:

• IDCW declared: Rs 50,000
• TDS deducted (20%): Rs 10,000
• Amount you receive: Rs 40,000

If your actual tax liability is lower than 20%, you can claim a refund by filing an ITR. But this requires extra effort and waiting for refunds.

Growth Option Taxation:

With Growth, you're taxed only when you redeem units. The tax rate depends on holding period and fund type.

For Equity Funds (FY 2025-26):

For Debt Funds:

All gains taxed at your slab rate, regardless of holding period.

(Union Budget 2024 Changes)

Why Growth Wins on Tax:

With Growth, your full corpus keeps compounding without annual tax drag. With IDCW, you pay tax every time a payout is made, reducing the amount available for future growth.

For an NRI in the 30% tax bracket receiving Rs 1 lakh in IDCW annually, that's Rs 30,000 gone to taxes each year. Over 10 years, this tax drag compounds into a significant sum.

The Compounding Math: A 10-Year Comparison

Let's compare a Rs 10 lakh investment over 10 years, assuming 12% annual returns.

Scenario 1: Growth Option

Year 1: Rs 10,00,000 x 1.12 = Rs 11,20,000 Year 5: Rs 17,62,342 Year 10: Rs 31,05,848

No tax paid until redemption. Full compounding power.

Scenario 2: IDCW Option (assuming full profits distributed)

Year 1: Rs 10,00,000 grows to Rs 11,20,000. IDCW of Rs 1,20,000 declared. After 20% TDS: You receive Rs 96,000. Investment back to Rs 10,00,000.

This pattern repeats each year. Your investment never compounds because profits are distributed annually.

After 10 years: Investment value remains around Rs 10,00,000. Total IDCW received: Rs 9,60,000 (after taxes).

Total with Growth: Rs 31,05,848 (before exit tax) Total with IDCW: Rs 19,60,000 (investment + post-tax payouts)

The difference: Over Rs 11 lakh.

This example is simplified. Actual IDCW payouts vary based on fund performance and don't always equal full profits. But the principle holds: removing money from compounding has a massive long-term cost.

👉 Tip: Use our SIP calculator to model how compounding impacts your specific investment amount and time horizon.

When Does IDCW Actually Make Sense?

Despite the math favoring Growth, IDCW has legitimate use cases:

1. Retirees Needing Regular Income

If you're retired and need monthly income from investments, IDCW can provide cash flow. However, there's a better alternative (SWP, discussed below).

2. Investors in Lower Tax Brackets

If your total income falls below Rs 12 lakh under the new tax regime, you may pay zero tax on IDCW income. But this scenario is rare for UAE-based NRIs with foreign income.

3. Short-Term Parking of Funds

If you're investing for less than a year and need periodic access to gains, IDCW provides automatic distribution. Though again, SWP is usually better.

4. Psychological Comfort

Some investors feel more comfortable seeing regular payouts, even if mathematically suboptimal. If IDCW keeps you invested rather than panic-selling during downturns, the behavioral benefit might outweigh the tax cost.

For most NRIs building long-term wealth, these scenarios don't apply. Growth remains the better choice.

SWP: The Better Alternative to IDCW for Regular Income

If you need regular income from mutual funds, there's a smarter option than IDCW: the Systematic Withdrawal Plan (SWP).

How SWP Works:

You invest in the Growth option. Then you set up a standing instruction to withdraw a fixed amount monthly, quarterly, or annually. The fund redeems units to generate your withdrawal.

Example:

Investment: Rs 20 lakh in Growth option at NAV Rs 100 (20,000 units) SWP: Rs 50,000 monthly

Month 1: Fund redeems 500 units (Rs 50,000 / Rs 100 NAV). You receive Rs 50,000. Remaining units: 19,500.

If NAV rises to Rs 105, next month's redemption is fewer units (476 units for Rs 50,000).

Why SWP Beats IDCW:

The Tax Advantage of SWP:

With SWP, only the gain portion of your withdrawal is taxed. The principal portion is not.

Example (Rs 1 lakh withdrawal after 2 years):

• Original investment: Rs 80,000 (cost basis)
• Current value: Rs 1,00,000
• Gain: Rs 20,000
• Tax (12.5% LTCG): Rs 2,500

With IDCW, the full Rs 1 lakh payout would be taxed at your slab rate (say 30%): Rs 30,000 tax.

According to PGIM India's analysis, on a Rs 50 lakh investment growing 12% annually, you'd pay Rs 59,375 tax via SWP but Rs 1,87,200 via IDCW (at 30% bracket). That's over Rs 1.27 lakh saved in one year. (PGIM India)

👉 Tip: If you need regular income from mutual funds, invest in the Growth option and set up an SWP. You'll have full control over timing and amount, plus significant tax savings.

NAV Comparison: Growth vs IDCW of Same Fund

A common source of confusion: Why does the Growth option of a fund have a much higher NAV than the IDCW option?

The same fund launched on the same date will have very different NAVs after a few years:

Example (Hypothetical Fund Launched in 2015):

The underlying portfolio is identical. The difference is that the IDCW option has distributed payouts over the years, each time reducing the NAV.

This doesn't mean Growth investors are "richer" at any given moment. It means their entire return is still invested, while IDCW investors have received portions back (minus taxes).

Important: A lower NAV doesn't mean IDCW is a "cheaper" entry point. You're buying the same underlying portfolio. The number of units you get differs, but the investment value is the same.

IDCW Reinvestment: The Worst of Both Worlds?

Some investors choose IDCW Reinvestment, thinking it combines regular payouts with compounding. Unfortunately, it often delivers neither benefit well.

How IDCW Reinvestment Works:

The fund declares IDCW. Instead of cash to your bank, the payout buys additional units at current NAV.

The Problem:

Even though money is reinvested, the payout is still treated as income for tax purposes. You owe tax on the IDCW amount, even though you never received cash.

For NRIs, 20% TDS is deducted before reinvestment. So if Rs 10,000 IDCW is declared, only Rs 8,000 gets reinvested.

You've paid tax, not received cash, and ended up with less compounding than the pure Growth option. Truly the worst of both worlds.

(Zerodha Fund House)

NRI-Specific Considerations for Growth vs IDCW

NRIs face unique factors when choosing between Growth and IDCW:

1. Higher TDS on IDCW

Resident Indians face 10% TDS on IDCW above Rs 5,000. NRIs face 20% TDS on all IDCW payouts. This makes IDCW even more expensive for NRIs.

(Section 196A, Income Tax Act)

2. DTAA Benefits May Reduce TDS

If your country has a Double Tax Avoidance Agreement with India, you may claim lower TDS rates. But this requires submitting Tax Residency Certificate (TRC), Form 10F, and self-declaration to the fund house. Many AMCs still deduct standard TDS due to system limitations.

3. Repatriation Considerations

Both Growth redemptions and IDCW payouts from NRE-linked investments are fully repatriable. If invested via NRO, repatriation rules apply (up to $1 million annually with tax clearance).

4. Currency Timing

With IDCW, you receive INR payouts at intervals you don't control. With Growth + SWP, you control exactly when to convert to AED/USD, potentially timing for favorable exchange rates.

Use our Rupee vs Dollar Tracker to monitor exchange rates and plan withdrawals strategically.

👉 Tip: Given the 20% TDS on IDCW for NRIs, the Growth option is almost always preferable. If you need income, use SWP after 12 months to benefit from lower LTCG rates.

The GIFT City Advantage: Zero Tax on Both Options

For NRIs investing through GIFT City, the Growth vs IDCW debate changes slightly. GIFT City mutual funds offer:

• Zero capital gains tax for NRIs
• Zero TDS on redemptions
• Zero Securities Transaction Tax

This eliminates the tax drag that makes IDCW costly in regular mutual funds. However, the compounding advantage of Growth still applies. Even without tax considerations, keeping money invested beats regular withdrawals.

Explore GIFT City mutual funds like Tata India Dynamic Equity Fund or DSP Global Equity Fund through the Belong app for tax-free investing.

How to Switch from IDCW to Growth

If you're currently in an IDCW option and want to switch to Growth, here's what to know:

The Process:

1. Log into your mutual fund account or contact your AMC
2. Submit a "switch" request from IDCW to Growth option
3. The AMC redeems your IDCW units and purchases Growth units

Important Tax Implications:

A switch is treated as redemption + fresh purchase. You'll owe capital gains tax on any appreciation in your IDCW units.

Example:

• IDCW units purchased at Rs 20,000
• Current value: Rs 30,000
• Gain on switch: Rs 10,000 (taxable)

If held over 12 months (equity fund): 12.5% LTCG on Rs 10,000 = Rs 1,250 tax.

Despite this one-time tax, switching to Growth usually makes sense for long-term investments. The future compounding benefit outweighs the immediate tax cost.

Check if exit loads apply. Many funds have exit loads for redemptions within 1 year.

Common Mistakes NRI Investors Make

1. Choosing IDCW for "Regular Income" Without Doing the Math

Many investors pick IDCW thinking it provides income. They don't realize they're just withdrawing their own money, minus taxes. SWP from Growth is almost always better.

2. Not Understanding the 20% TDS Hit

NRIs lose 20% of every IDCW payout to TDS immediately. Even if you can claim refunds, the cash flow hit and paperwork make IDCW unattractive.

3. Confusing High NAV with Expensive

Some investors avoid Growth options because the NAV seems "high." A Rs 85 NAV isn't more expensive than Rs 32 NAV. You just get fewer units. The underlying investment value is identical.

4. Selecting IDCW Reinvestment Thinking It Equals Growth

IDCW Reinvestment triggers tax liability without providing cash. It's strictly inferior to the Growth option for compounding.

5. Not Considering Time Horizon

IDCW might make sense if you need income immediately and have no other options. For any goal 3+ years away, Growth is mathematically superior.

Decision Framework: Which Should You Choose?

Choose Growth Option When:

• You don't need regular income from this investment
• Your investment horizon is 3+ years
• You're in a higher tax bracket (20% or 30%)
• You want maximum compounding
• You're building a retirement corpus
• You can use SWP later if income is needed

Choose IDCW Option When:

• You need immediate, regular income
• You're in the lowest tax bracket (and total income below Rs 12 lakh)
• You have no other income sources
• You're comfortable with unpredictable payout amounts
• You've considered and rejected SWP as an alternative

For most NRI investors in the UAE with employment income, Growth is the clear winner. The compounding benefit and tax efficiency make it the default choice for wealth building.

The Bottom Line

The Growth vs IDCW choice shouldn't be complicated. For the vast majority of investors, especially NRIs, Growth is the superior option.

The math is clear: Compounding works only when your money stays invested. Every IDCW payout removes capital from the growth engine and triggers immediate taxation.

For NRIs facing 20% TDS on every IDCW payout, the tax drag makes the choice even more obvious. Your money should work for you, not flow back to you in tax-reduced installments.

If you genuinely need regular income from investments, skip IDCW entirely. Use the Growth option and set up a Systematic Withdrawal Plan. You'll control the timing and amount, pay tax only on gains, and keep more money compounding longer.

The only scenario where IDCW might make sense: You're retired, have no other income sources, fall below the Rs 12 lakh tax-free threshold, and prefer not to manage SWP. For everyone else, Growth wins.

Want to discuss which approach fits your situation? Join our WhatsApp community where NRIs share strategies and experiences daily. Download the Belong app to explore tax-efficient GIFT City mutual funds where the Growth advantage compounds even faster without tax drag.

Your money deserves to compound uninterrupted. Choose Growth.

Sources:

• SEBI Circular on IDCW Nomenclature (April 2021)
• Income Tax Department - Section 196A
• Kotak MF - Mutual Fund Taxation FY 2024-25
• PGIM India - SWP vs IDCW Tax Efficiency
• Zerodha - Growth vs IDCW
• Groww - Growth Option vs IDCW
• Value Research - SWP vs IDCW Tax Rules