Growth vs Income in GIFT City Funds for NRIs

A quick math problem. Two NRIs in Dubai invest $10,000 each in the same GIFT City equity fund.

One picks Growth. The other picks Income (also called IDCW).

Ten years later, one has roughly $25,900. The other has about $21,200.

Same fund. Same market. Same entry point.

A $4,700 gap created by a single checkbox at the time of investing.

In regular Indian mutual funds, this Growth vs IDCW debate is already settled for most experts. Growth wins for wealth creation. Income wins for retirees who need cash flow.

But GIFT City mutual funds change the math in ways most NRIs don't expect.

At Belong, we help NRIs navigate exactly these decisions. The tax rules are different in GIFT City. The payout mechanics are different.

And the "right answer" depends on things most articles never mention, like which country you live in and when you plan to return to India.

This guide walks through every angle.

By the end, you'll know exactly which option fits your situation and why.

What "Growth" and "Income" Actually Mean

Let's define these clearly before anything else. When you invest in a mutual fund, the fund earns money in two ways: the stocks or bonds it holds go up in value, and those holdings pay dividends or interest.

In a Growth option, all of that earnings stays inside the fund. Nothing is paid out to you. Your money compounds, and the fund's NAV (Net Asset Value) keeps rising.

In an Income option (formally called IDCW, which stands for Income Distribution cum Capital Withdrawal), the fund periodically pays you a portion of the earnings.

Sometimes monthly, sometimes quarterly, sometimes annually. Your NAV drops by the amount paid out.

Here's what confuses many people. SEBI renamed the "dividend" option to IDCW in 2021 to make something clear: these payouts aren't just profits. They can include a return of your own invested capital (Source: SEBI Circular, 2021).

You might get a ₹5,000 payout and think you've earned ₹5,000. In reality, part of it could be your own money coming back.

GIFT City funds follow similar structures but under IFSCA regulations, not SEBI. The terminology may vary, but the underlying mechanics, Growth (reinvest everything) vs Income (pay some out), remain the same.

👉 Tip: Whenever you see "IDCW" or "Dividend option" in any mutual fund, remember: it's not a bonus. It's your own money being returned to you, often with a tax bill attached. The Growth option keeps everything working for you.

Why the Answer Is Different in GIFT City

In regular Indian mutual funds, NRIs face 20% TDS (Tax Deducted at Source) on every IDCW payout (Source: Section 196A, Income Tax Act).

That's before you even decide whether the payout was worth it. Your ₹10,000 payout becomes ₹8,000 after TDS.

GIFT City rewrites this equation. Under Section 10(4D) of the Income Tax Act, income from specified IFSCA-registered funds is exempt from Indian income tax for non-residents.

No TDS on redemptions. No TDS on distributions. No STT. No GST on management fees.

For UAE-based NRIs with zero income tax in their resident country, this means GIFT City fund distributions could be genuinely tax-free.

No 20% haircut. No ITR filing just to claim a TDS refund.

Does this mean the Income option suddenly becomes attractive in GIFT City? Not so fast.

The tax-free status removes the biggest penalty of IDCW. But it doesn't fix the compounding problem. Even without taxes, every dollar paid out is a dollar that stops compounding inside the fund.

The real question isn't "which saves more tax?" In GIFT City, both options are tax-efficient.

The real question is: "Do I need cash flow from this investment right now, or do I want maximum growth?"

The Compounding Gap: How Growth Pulls Ahead

Numbers tell this story better than words. Let's compare two scenarios with a $25,000 investment in a GIFT City equity fund earning 12% annually.

Scenario A (Growth): All returns reinvested.

After 10 years, your investment grows to approximately $77,646. After 15 years: $136,844. After 20 years: $241,157.

Scenario B (Income with 3% annual payout): The fund distributes 3% of NAV annually. You receive cash, but the base amount compounding is reduced.

After 10 years, your fund value is roughly $58,700 plus about $10,500 in total payouts received = $69,200 combined.

After 15 years: about $120,400 combined. After 20 years: roughly $200,100 combined.

The gap over 20 years: approximately $41,000 on a $25,000 investment. That's 17% less total wealth simply because money was pulled out instead of being left to compound.

This gap exists even in a zero-tax GIFT City environment. It's pure math. Every payout reduces the base on which future returns are calculated.

👉 Tip: The compounding advantage grows exponentially over time. For NRIs with a 10+ year horizon, the Growth option in GIFT City funds creates substantially more wealth, even when both options are tax-free. The longer you stay invested, the wider the gap.

When the Income Option Makes Sense in GIFT City

Despite the compounding math, there are real situations where the Income option is the right choice. Ignoring them would be dishonest.

You're retired or semi-retired and need cash flow.

If you've moved back to India or are living off savings in the UAE, and your GIFT City fund is part of your retirement corpus, regular payouts matter.

You need money to live on. Compounding is great, but you can't eat NAV.

For retired NRIs, the Income option from a GIFT City fund provides USD-denominated cash flow without the 20% TDS that a regular Indian mutual fund would impose.

If you're in a zero-tax country, that's genuine tax-free income.

You're supporting family in India.

Many NRIs use investment income to fund parents' expenses, siblings' education, or property maintenance. Regular GIFT City fund payouts can serve this purpose, flowing directly to your IBU account and then to your family.

You want to create a predictable income stream without selling units.

Selling units (partial redemption) achieves the same result as IDCW payouts, but some investors prefer the automatic distribution.

It removes the temptation to not withdraw when needed.

You're using it as a dividend replacement for your portfolio.

If you've previously relied on dividend stocks in India and want a similar experience through GIFT City, the Income option mimics that structure.

Just remember: unlike company dividends, IDCW payouts include capital withdrawal.

👉 Tip: If you need regular income, compare the Income option against a Systematic Withdrawal Plan (SWP) from the Growth option before deciding. SWP is often superior. We'll explain exactly why in the next section.

SWP From Growth: The Strategy Most NRIs Miss

Here's what we tell NRIs in our WhatsApp community at Belong who want regular income: don't pick the Income option.

Pick Growth. Then set up a Systematic Withdrawal Plan.

An SWP lets you withdraw a fixed dollar amount from your Growth-option fund at regular intervals: monthly, quarterly, or annually. It's like creating your own "income" from the fund.

Why is this better than the IDCW option?

You control the amount.

IDCW payouts depend on the fund manager's decision. They might pay $300 one quarter and $50 the next. With SWP, you decide exactly how much you need. $500 per month? Done. $2,000 per quarter? Done.

You control the timing.

IDCW payouts happen when the fund declares them. You have no say in when money shows up. SWP puts you in control of the schedule.

The remaining corpus keeps compounding at full speed.

In a Growth option with SWP, only the withdrawn amount exits the fund. The rest stays invested and continues compounding on the full balance.

With IDCW, the entire payout amount leaves the fund, even if you don't need all of it.

Tax efficiency is at least equal, often better.

In GIFT City, both options enjoy tax-free treatment for non-residents.

But in the scenario where you eventually become a resident (after returning to India), SWP withdrawals are treated as partial redemptions with capital gains implications, while IDCW is treated as "income from other sources" taxed at slab rates.

Capital gains treatment is usually more favorable.

A practical example: Meera (name changed), a 52-year-old NRI in Abu Dhabi, has $100,000 in a GIFT City equity fund earning 10% annually. She needs $500 per month.

With IDCW: The fund might pay $400 one month and $700 the next. She can't plan around it. When markets drop, the fund might skip payouts entirely.

With SWP from Growth: She sets up a $500 monthly withdrawal.

The remaining $99,500 keeps compounding. Even while withdrawing $6,000 per year, her corpus grows if the fund returns exceed her withdrawal rate.

After 10 years, she's received $60,000 in cash AND her fund is still worth more than her original investment.

👉 Tip: SWP from Growth is almost always better than IDCW for generating regular income. You get predictability, control, and better compounding. Ask your investment platform if the GIFT City fund you're considering supports SWP.

Tax Treatment Compared: Regular MFs vs GIFT City

This is where GIFT City truly changes the Growth vs Income calculus. Let's compare side by side.

Regular Indian mutual fund (IDCW option) for NRIs:

Every IDCW payout faces 20% TDS under Section 196A of the Income Tax Act. If you receive ₹50,000 in IDCW, ₹10,000 is deducted before the money reaches your account.

To get any of it back, you need to file an Indian ITR and claim a refund, a process that can take months.

IDCW income is classified as "income from other sources" and taxed at your applicable slab rate.

For most NRIs, this is 30% (including surcharge and cess, the effective rate can exceed 30%).

Regular Indian mutual fund (Growth option) for NRIs:

No tax event until you redeem. When you sell, equity fund LTCG above ₹1.25 lakh is taxed at 12.5%. STCG is taxed at 20%. TDS applies at these rates.

GIFT City mutual fund (either option) for UAE NRIs:

No TDS on distributions. No TDS on redemptions. No capital gains tax in India for non-residents under Section 10(4D).

No income tax in UAE (Source: Income Tax Act, Section 10(4D)).

The effective tax rate: 0%.

This table makes the case for GIFT City crystal clear. But within GIFT City, the Growth option still wins for wealth builders because of compounding, not tax.

The Income option wins only if you genuinely need regular cash flow.

👉 Tip: For UK-based NRIs, GIFT City doesn't eliminate UK taxes on foreign income. Growth is even more critical because it defers the UK tax event until redemption, potentially allowing you to time it during a low-income year or during your RNOR period after returning to India.

How NAV Behaves Differently in Each Option

This is a detail most articles skip, but it matters when you're tracking your GIFT City fund performance.

In the Growth option, NAV only goes up (in rising markets) or down (in falling markets). It reflects the full cumulative value of your investment plus all reinvested earnings.

If you invested at NAV $10 and the fund grew 50%, your NAV is $15. Simple.

In the Income option, NAV drops every time a payout is declared. If your fund NAV is $15 and the fund distributes $1 per unit, the NAV falls to $14. Your account gets credited with $1 per unit. The total value (NAV + received payouts) is the same, but the NAV alone looks lower.

This confuses many NRIs. They see their Growth-option friend's NAV at $18 and their own Income-option NAV at $13, and they panic.

But the Income-option investor also received $5 in cumulative payouts. The total is the same.

Except it's not quite the same. Those payouts in the Income option didn't compound further inside the fund. The Growth investor's $18 NAV includes compounding on the full amount.

The Income investor's $13 NAV + $5 in cash totals $18, but only if those payouts were reinvested elsewhere at the same rate. Most people don't reinvest them systematically.

This is the behavioral trap. Income payouts feel like "free money." NRIs tend to spend them. That spending is what creates the real compounding gap over decades.

👉 Tip: If you choose the Income option, treat every payout as an investment decision. Will you reinvest it? Spend it? Let it sit in a savings account earning 0.5%? Your answer determines whether IDCW costs you money in the long run. Compare how mutual funds work in Growth vs Income modes to understand NAV behavior fully.

The IDCW Reinvestment Trap

Some funds offer a third option: IDCW Reinvestment. This sounds like the best of both worlds. You get the payout, but it's automatically reinvested into the fund.

In regular Indian mutual funds, this option is a disaster for NRIs. The payout is taxable as income even though you never received cash.

NRIs face 20% TDS on the reinvested amount. So ₹10,000 is declared as IDCW, ₹8,000 gets reinvested, and you've lost ₹2,000 to TDS without ever touching the money.

In GIFT City, the TDS issue disappears for non-residents. But the IDCW Reinvestment option still creates unnecessary complexity.

The payout is declared, the NAV drops, and the money is reinvested at the lower NAV. You end up with more units at a lower NAV, but the total value is roughly the same as the Growth option.

So why bother? With Growth, you get the same compounding without the extra steps. No payout declaration, no NAV drop, no reinvestment transaction. Cleaner, simpler, identical financial outcome.

The only scenario where IDCW Reinvestment might differ is if the fund changes its investment strategy between the payout and reinvestment. This is unlikely in practice.

👉 Tip: Skip IDCW Reinvestment entirely in GIFT City. It adds complexity without adding value. The Growth option does the same thing with less paperwork.

Fund-Specific Options Available in GIFT City Right Now

Let's map this to actual GIFT City funds you can invest in through Belong.

Tata India Dynamic Equity Fund GIFT IFSC

This fund launched in September 2025 with a $500 minimum (Source: Business Standard). It invests in Tata AMC's Indian equity mutual fund schemes and ETFs, dynamically allocating 50-100% to broad-based equity and 0-50% to thematic opportunities.

For this fund, the Growth option is the clear default for most NRIs. It's designed for capital appreciation over 5+ years. Unless you're retired and need income from a $500 investment (unlikely), Growth maximizes the GIFT City tax-free compounding advantage.

DSP Global Equity Fund GIFT IFSC

This global equity fund holds stocks like Amazon and Meta. Launched June 2025, taxes are built into the daily NAV.

Again, Growth suits most NRI investors. If you're building international exposure alongside your India allocation, you want maximum compounding in USD. The fund's global equity nature means it's positioned for long-term growth, not income distribution.

Edelweiss Greater China Equity Fund GIFT IFSC

A focused China equity play. High risk, high potential reward. Designed for aggressive growth, not income generation.

Growth is the only sensible option here. You're investing in Chinese equities for capital appreciation over a 7+ year horizon. Taking income payouts from a volatile, growth-oriented fund defeats the purpose.

Sundaram India Mid Cap FundGIFT IFSC

Indian mid-cap exposure through GIFT City. Mid-caps are growth assets, not income generators.

Growth option. Full stop. Mid-cap funds can swing 30-40% in either direction.

IDCW payouts from a volatile fund are unpredictable and undermine the compounding that makes mid-cap investing worthwhile over long periods.

Matching the Option to Your Life Stage

Your age and financial phase should drive this decision. The same NRI might choose differently at 35 and at 55.

Wealth building phase (25-45): Growth. Every time. You're earning, saving, and don't need investment income.

Let compounding run for 15-20 years without interruption. Even if GIFT City offers tax-free IDCW, the compounding loss isn't worth it.

At this stage, your focus should be on accumulating units, not receiving payouts. Start a SIP if the fund supports it, or invest lump sums when you have surplus. The money should stay in the fund.

Transition phase (45-55): Still Growth for equity funds.

But start building a separate income layer through GIFT City USD fixed deposits or debt funds. Keep your equity funds in Growth mode while your FDs generate guaranteed cash flow.

This is when asset allocation matters most. Don't turn your growth engine into an income source prematurely. Instead, add income instruments alongside it.

Retirement phase (55+): Consider SWP from Growth-option funds.

If SWP isn't available for a specific GIFT City fund, the Income option becomes a reasonable choice. But only if you've confirmed you need the cash flow AND the fund actually offers consistent payouts.

Even in retirement, keep 30-50% of your GIFT City allocation in Growth mode. You may live 30+ years post-retirement. That money still needs to grow to keep pace with inflation.

👉 Tip: The "right" option isn't permanent. You can switch from Growth to Income (or vice versa) within GIFT City funds, though this may be treated as a redemption and fresh purchase. Plan your switch timing around your retirement strategy rather than reacting to market movements.

Currency Impact on Your Growth vs Income Decision

GIFT City funds operate in USD. This adds a layer that regular Growth vs IDCW articles don't cover.

If you pick the Income option and receive payouts in USD, what do you do with that cash? If you're in the UAE (AED pegged to USD), it sits in your bank account or IBU earning minimal interest.

You've traded 12% fund growth for 0.5% savings account returns on the paid-out amount.

If you're sending that income to India for family support, you'll convert USD to INR. The rupee has depreciated roughly 3-4% annually against the dollar over the past decade (Source: RBI Annual Report).

So your IDCW payouts buy more rupees each year. That's genuinely useful for funding parents' expenses or property upkeep in India.

But here's the counterargument. In the Growth option, your $25,000 compounds to $77,646 over 10 years at 12%.

You can then do a single large redemption and convert at that day's favorable exchange rate. The total rupee value of a lump-sum withdrawal after a decade of compounding far exceeds the cumulative value of small annual IDCW payouts.

The exception is if you need the rupees NOW and can't wait 10 years. In that case, IDCW payouts converted to INR serve an immediate practical purpose.

👉 Tip: Don't convert GIFT City payouts to INR unless you have an immediate use. USD cash sitting idle in your bank account is money that's not working. If you don't need the income, the Growth option keeps your money fully deployed. Track rupee vs dollar trends on Belong to time large conversions smartly.

What Happens If You Return to India?

Your Growth vs Income choice has long-term implications if you're planning to move back.

While you're an NRI, GIFT City fund returns (both Growth and Income) enjoy tax-exempt status under Section 10(4D). But once you become a resident, the rules change.

During your RNOR period (typically 2-3 years after returning), foreign income is still exempt from Indian tax.

Your GIFT City investments are treated as foreign income. This is your window to redeem Growth-option funds or continue receiving IDCW payouts tax-free.

After becoming a full Resident and Ordinarily Resident (ROR), your worldwide income becomes taxable in India.

GIFT City fund income would then be subject to Indian tax rules. At that point, the Growth option provides better flexibility because you control when to trigger a taxable event through redemption.

If you're on the Income option when you become ROR, every payout creates a tax event you can't avoid.

With Growth, you can choose to redeem only in years when your income is lower, or spread redemptions across multiple financial years to stay in favorable tax brackets.

This return-to-India lens makes Growth even more compelling for NRIs who might eventually move back. You keep maximum optionality.

👉 Tip: If return to India is even a possibility in the next 10 years, choose Growth. It gives you the most tax planning flexibility during the RNOR transition. Read our detailed financial checklist for returning NRIs to plan your GIFT City exit strategy.

GIFT City FDs vs Fund Income: Don't Confuse the Two

Some NRIs conflate "income from GIFT City mutual funds" with "interest from GIFT City fixed deposits." These are completely different products.

GIFT City USD fixed deposits pay guaranteed interest at a fixed rate (currently around 5% on USD deposits).

This interest is genuine income. It doesn't reduce your principal. It's predictable. And for non-residents, it's tax-free in India.

GIFT City mutual fund IDCW payouts are NOT guaranteed. They depend on fund performance and the fund manager's decision.

They CAN include capital withdrawal (your own money returned to you). They're unpredictable.

If you want reliable income from GIFT City, FDs are a cleaner instrument. Use mutual funds for growth. Don't force a growth instrument to do an income job.

The ideal setup for an NRI who needs both growth AND income from GIFT City: put your growth allocation in equity mutual funds (Growth option) and your income allocation in GIFT City USD FDs.

Each product does what it's designed to do.

👉 Tip: Compare current GIFT City FD rates on Belong. For pure income needs, a 5% guaranteed USD return with zero tax often beats unpredictable IDCW payouts from equity funds. Explore GIFT City AIFs for higher-yield alternatives if your corpus exceeds $75,000.

The Behavioral Angle: Why Smart NRIs Still Pick Wrong

We've seen this pattern across thousands of conversations in our community. NRIs who intellectually understand that Growth is better still choose Income. Here's why, and how to avoid the trap.

"I want to see returns coming in."

This is the most common reason. Watching IDCW credits hit your account feels rewarding. Watching a Growth NAV inch up feels abstract.

The brain treats received cash as a "win" and unrealized growth as "theoretical."

The fix: check your fund's total return (NAV growth + distributions) instead of just looking at payouts.

Most platforms, including Belong, show you total returns regardless of the option you've chosen.

"I'll reinvest the payouts anyway."

Many NRIs say they'll put the IDCW money back into the fund. In reality, most don't. Life happens: a car repair, a vacation, a family event.

The payout gets spent. Even if it sits in a savings account for three months before reinvestment, those months of lost compounding add up over years.

"Growth is risky because I can't take money out."

This is a misconception. Growth-option funds are redeemable anytime (subject to exit loads). You're not locked in.

You just choose WHEN to take money out rather than having the fund decide for you.

"IDCW protects me in down markets because I've already received some money."

This is partly true but misleading. In a market crash, your IDCW-option NAV drops just as much as the Growth-option NAV (minus whatever was already paid out).

The payouts you received don't protect the remaining corpus. They simply reduced your exposure, which is the same as selling units manually.

Quick Decision Framework

After everything we've covered, here's the simplified decision tree.

Step 1: Do you need cash from this investment in the next 3 years?

If no → Growth. Period.

If yes → Proceed to Step 2.

Step 2: Can you set up an SWP from a Growth-option fund?

If yes → Growth + SWP. This gives you income with better compounding and more control.

If no (SWP not available for the specific fund) → Income/IDCW option. It's your only automated payout mechanism.

Step 3: How much income do you need relative to your corpus?

If under 4% annually → SWP from Growth won't significantly dent your compounding.

If over 6% annually → You're drawing down your investment, not living off returns. Consider GIFT City FDs for the income portion and keep mutual funds in Growth.

Choose the Right Engine for Your Money

Growth and Income aren't "good" and "bad." They're different engines built for different jobs.

Growth is a compounding engine. It's designed to multiply your wealth over time. Income is a distribution engine. It's designed to give you cash flow from your investments.

In GIFT City, the tax penalty that normally kills the Income option for NRIs doesn't exist. That makes Income a more viable choice than in regular Indian mutual funds. But compounding math still favors Growth for anyone who doesn't need the cash today.

The GIFT City ecosystem now hosts over 200 fund management entities with committed capital exceeding $15 billion (Source: IFSCA Bulletin Q1 2025). As more retail funds launch with $500 minimums, the Growth vs Income choice will matter for tens of thousands more NRIs.

Many NRIs discuss these exact decisions daily in Belong's WhatsApp community. If you're torn between Growth and Income for a specific fund, ask there. You'll hear from people who've made both choices and can share their real experience.

Ready to invest? Download the Belong app to explore GIFT City mutual fund options, compare FD rates, and start building your tax-efficient portfolio today.

Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing. This article is for educational purposes and does not constitute personalized investment advice. Tax treatment depends on individual circumstances and jurisdiction. Consult a SEBI-registered advisor and qualified tax professional for advice specific to your situation. Past performance does not guarantee future results. The compounding examples use illustrative returns and may not reflect actual fund performance.