SWP Or Dividend (IDCW)?

Shakespeare said – What’s in a name? But in reality, naming a thing has lot to do with how we perceive a thing. Take, for example what we used to refer earlier (many of us still use that in casual terms) as ‘Dividend’ in a mutual fund. That time, it was often thought that dividend received from a mutual fund scheme is same as dividend received from a stock we hold, which it is not. To clear that confusion, SEBI rechristened it as IDCW (Income Distribution cum Capital Withdrawal). Did this rename help? Let’s see.

How IDCW (earlier known as mutual fund dividend) is different from stock dividend?

When we receive a dividend from a stock we hold, it is sharing of profit earned by the respective company. When a company declares dividend on its stock, it does not bring down the stock price anyway. In layman’s term, we can refer receiving dividend from stocks as ‘extra income’ which is over and above the unrealized or realized gains we receive from holding that stock.

But in case of mutual fund, ‘dividend’ is compulsorily to be paid out from realized gains by the fund manager. So, paying out such ‘dividend’ of course results in a drop of its unit value or NAV as it is distributing income to certain unit holders (who opted for it) by withdrawing from its capital – thus the apt name for this activity is Income Distribution cum Capital Withdrawal.

What is SWP (Systematic Withdrawal Plan) then?

In case of SWP, fund manager has no role to play. Instead, you are at the driver’s seat. It is nothing but you are redeeming your units, irrespective of whether that means realizing gain or loss. In case of IDCW, it must come from realizing gains, no exception there. Also, declaring ‘dividend’ from a mutual fund scheme depends solely on the fund manager. It is up to him or her to decide, both the ‘dividend’ amount and frequency.

How are SWWP and IDCW taxed?

IDCW or ‘dividend’ income received from a mutual fund scheme adds to a unit holder’s income (under ‘income from other sources’) and therefore taxed accordingly. So, if you are in 30% tax bracket, you are then taxed accordingly. In case of SWP, it comes to you as ‘capital gain’ (short-term or long-term) and not as income for you. Now, we all know that short-term gain from equity mutual fund is taxed at 15% and long-term gain from equity mutual fund is taxed at 10% (beyond Rs. 1 lakh gain from equity holding in a financial year). So taxing of SWP income has nothing to do with what tax bracket you fall into.

Conclusion

If you want to receive regular income from your mutual fund holdings at your preferred terms – that is frequency and amount of income are decided by you – then go for SWP. The added benefit here is SWP’s tax efficiency over IDCW option.