Difference Between SWP vs IDCW in Mutual Funds

Investors should know various investment strategies to meet the financial goals in the typical wealth management field. Two of the most common methods are systematic withdrawal plans (SWP) and income distribution cum capital withdrawal (IDCW).

Both SWP and IDCW provide a unique approach to managing and distributing dividends from investments made by investors. However, choosing between the two can be a mind-boggling task. Hence, this article will guide you and enable you to create a strategy for your financial goals by comparing IDCW vs SWP.

A Systematic Withdrawal Plan (SWP) is an investment tool that allows investors to withdraw a fixed amount from mutual funds regularly. The investor selects the amount and frequency of withdrawal. SWP generates a steady cash flow while allowing the remaining investment to grow.

Here, the investors keep their invested amount intact and can choose to withdraw the gains from the investment. At the predetermined date, units from the portfolio are sold, and the generated fund can be withdrawn from your account.

Income Distribution Cum Capital Withdrawal (IDCW) is a type of mutual fund that enables investors to generate income from dividends. Investors can withdraw the distributed income while the remaining invested capital continues to generate returns. This ensures a recurring income stream while keeping a portion of the investment intact.

Earlier, the IDCW was called a "Dividend Plan" and was renamed by the Securities and Exchange Board of India (SEBI) in April 2021. The amendment came into effect retrospectively. The net asset value (NAV) is income greater than capital, and all other shortfalls are capital withdrawal.

Types of IDCW In Mutual Funds

Taxation Rules of IDCW with an Example

Initially, companies paid a 15% Dividend Distribution Tax (DDT). However, since April 2020, mutual fund schemes have been taxed on the income of the respective investors based on their income tax slab on dividend earnings.

For Example:

• Consider an Initial investment of ₹5,00,000 in IDCW of an equity mutual fund.
• Dividend received: ₹50,000 in a year.
• Applicable tax rate: 30% as per investor's tax slab.
• Tax on Dividend
  • 30% of ₹50,000 = ₹15,000
• TDS Applicability
  • A Total Dividend of over ₹5,000 in one year TDS at 10% will be deducted
  • 10% of ₹50,000 = ₹5,000 at source is deducted
• Total tax payable: ₹15,000.

As TDS of ₹5,000 has already been deducted, the investor must pay the remaining ₹10,000 when filing the income tax.

Taxation Rules of SWP with an Example

In conclusion, SWP is a systematic withdrawal plan from the mutual fund, and the IDCW is a dividend distribution plan. The SWP and IDCW both pay benefits to wealth management and generation. However, they follow distinct approaches to dividend distribution.

Therefore, when choosing between them, consider your financial goals, risk tolerance, and preferences for making profits from your investments.

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