Growth vs IDCW Mutual Funds- Which Is Better for NRIs?

Between Growth vs IDCW mutual funds, NRIs often remain confused. Opting between Growth and IDCW options in mutual funds significantly impacts your returns from long-term investments. It is because in the Growth options, your profit is reinvested into your investment to create capital. In contrast, in the IDCW options, you get regular payouts that might involve your invested money.

In this blog, learn about the key differences between growth and IDCW mutual fund options for NRIs. Additionally, know how these investments work, their tax implications, and more, and maximize your tax returns by choosing the right investment. 

Understanding Growth and IDCW Options

Before moving on to the key difference between Growth vs IDCW mutual funds, let's first understand their meanings. 

What Is the Growth Option?

The Growth option in mutual funds is straightforward. In this investment option, all your profits stay invested in the funds. Additionally, during the holding periods, you do not get any payouts.

Considering this, when the fund obtains dividends from the stocks it holds, capital gains from selling securities, or interest from bonds, all of these are reinvested. This, over time, increases the Net Asset Value (NAV) of the funds. 

Further, let's know the key features of the Growth option:

• No regular payouts
• As profits accumulate, NAV increases
• Tax is imposed only when you redeem units
• Automatically compounding happens
• Unless you purchase more, the number of units remains constant

What Is the IDCW Option?

IDCW stands for Income Distribution cum Capital Withdrawal. Before April 2021, it was known as the "Dividend Option." This investment option provides your earned profits at set times. You can get the distribution yearly, quarterly, or monthly, based on what the investment scheme offers to you.

Additionally, these investments pay you either by selling some of its securities or from its collected profits. Further, let's know the key features of the IDCW option:

• Offers periodic payouts, i.e., annually, quarterly, or monthly
• After each payout, the NAV falls
• No offer guaranteed or fixed payouts
• Before every payments TDS is deducted
• Amount depends on the distributable surplus on fund

This was all about Growth and IDCW mutual funds. Moving ahead, let's look at the key differences between these investment options. 

Key Difference Between Growth and IDCW for NRIs

The table below, detailed comparison of Growth vs IDCW options in mutual funds:

So, this was all about the key difference between Growth vs IDCW mutual funds. Moving further, let's know how the Growth option works for NRIs. 

How Growth Option Works for NRIs?

To start mutual fund investments, NRIs need the correct banking infrastructure. Considering this, first, to manage your investments, you will need an NRE or NRO account. Furthermore, let's explore the investment process.

Investment Process

To get started, you need to submit some documents to complete your KYC. These include:

• Recent passport-sized photographs
• Overseas address proof
• Self-attested passport copies
• Bank statements

Using the online platforms, you can start investing. 

Return Calculation

By reinvesting capital gains back into the funds, growth plans generally offer higher returns. So you can enjoy the compounding impact on your investments.

Perks for Long-Term 

Growth plans offers wealth build options to NRIs. These are also tax-efficient as taxes are paid at the time of redemption. Additionally, over time, your returns compound get better. 

This is how growth investment plans work for NRIs. Moving ahead, let's know how the IDCW option works for NRIs. 

How IDCW Option Works for NRIs?

Under the IDCW option, a part of the profits from mutual funds, instead of reinvestment, is distributed to investors. For NRIs, investing in IDCW mutual funds can be made through NRE or NRO accounts after KYC. Additionally, the income is directly credited to their linked bank account after applicable tax and TDS deduction as per Indian tax laws. 

IDCW Payouts and Reinvestment

In the IDCW investment options, there are no guaranteed payouts. Its payments depend on the fund's performance and the decisions of fund houses. These payouts are made from the scheme's distributable surplus. Additionally, it may include both capital and income. 

Considering this, NRIs can either:

• For regular cash flow, NRIs can receive direct IDCW payouts into their NRE/NRO accounts.
• Also can opt to reinvest the amount distributed back into the same scheme. It helps maintain investment continuity while still receiving periodic contributions. 

So this is how the IDCW option works for NRIs. Moving on, let's look at the tax implications for NRI investors. 

Tax Implications for NRI Investors

Taxation is where IDCW and Growth split dramatically, specifically for NRIs.

IDCW Taxation

In India, payouts from IDCW are treated as "Income from Other Sources." They are added to investors' total income and taxed at the applicable slab rate. 

Additionally, under section 196A of the Income Tax Act, for NRIs, before paying the IDCW, the fund house deducts 20% TDS. For instance:

• Declared IDCW: INR 50,000
• Deducted TDS (20%): INR 10,000
• Received Amount: INR 40,000

Further, if your actual tax liability is less than 20%, by filing an ITR, you can claim a refund. However, this needs some extra effort and a wait for a refund.

Growth Option Taxation

With growth investments, you only pay tax when you redeem units. In this, the tax rate depends on your fund type and holding period. Considering this, for equity funds for the Financial Year (FY) 2025-26, the tax rate is:

Additionally, as per the changes in the Union Budget 2024, regardless of holding period, all capital gains will be taxed as per your slab rate. 

Further, with growth mutual funds with annual tax drag, your full capital keeps compounding. However, with IDCW mutual funds, every time a payment is made, you pay tax. It decreases the amount of future growth. 

Moreover, for an NRI who is in the tax bracket of 30%, obtaining INR 1,00,000 in IDCW annually, each year INR 30,000 is gone. Over 10 years, this amount outcomes into a significant sum. 

So, this was all about the taxation difference NRIs face in Growth and IDCW mutual funds. Moving ahead, let's discuss the NRI-specific considerations for Growth vs IDCW. 

NRI-Specific Considerations for Growth vs IDCW

When deciding between Growth and IDCW, NRIs faced unique factors. These are as follows:

• Higher TDS on IDCW: On IDCW above INR 5,000, resident Indians are accountable for 10% TDS. However, under section 196A of the Income Tax Act, NRIs are liable to pay 20% TDS on all IDCW payouts. Considering this, IDCW becomes more costly for NRIs.
• DTAA Benefits May Reduce TDS: If your resident country has signed a Double Tax Avoidance Agreement with India, you may apply for lower TDS rates. However, for this, you need to submit a Tax Residency Certificate (TRC), Form 10F, and a self-declaration to the fund house. Further, because of system limitations, many AMCs still deduct standard TDS.
• Repartiation Considerations: Both IDCW payouts and Growth redemptions, if liked to NRE accounts, are fully repatriable. However, if these are invested via NRO accounts, the repatriation rules are imposed. According to this, you can transfer up to USD 1 million per financial year with tax clearance. 
• Currency Timing: With IDCW, you receive INR payouts at intervals over which you do not have any control. However, with Growth + SWP, you have complete control over when to convert to USD/ AED, potentially timing for favorable exchange rates.

So, this was all about NRI-specific consideration for Growth vs IDCW. Moving further, let's know how NRIs should choose between these two mutual fund investments. 

How NRIs Should Choose Between Growth and IDCW?

Among the Growth and IDCW mutual funds, NRIs should choose the one that matches their investment goals, risk appetite, and time horizon. Further, let's know about this in some detail:

• Opt for Growth Mutual Funds When:
  • Not seeking a regular income from investment
  • Investment horizon is 3+ years
  • Looking for maximum compounding
  • Come in a higher tax bracket, i.e., 20% or 30%
  • Building a retirement corpus
• Opt for IDCW Mutual Funds When:
  • Need an immediate, regular income
  • Come in a lower tax bracket and your total income is less than INR 12,00,000
  • Do not have any other source of income
  • Comfortable with the unpredictable amount of payment

Moreover, for most NRIs, the Growth mutual fund is clearly a suitable investment option. The tax efficiency and compounding benefit make this investment a perfect choice for wealth building. 

Final Thoughts

Lastly, the Growth vs IDCW mutual fund choice is not so complicated. For the majority of investors, specifically for NRIs, Growth is the superior option. These options over long runs offer better returns, especially through NRE accounts that allow you to transfer funds without restriction. In contrast, IDCW plans are a good option if you prefer getting a regular income more than increasing your returns. Additionally, compared to IDCW, these plans generally provide tax and compounding benefits that create more value. 

Furthermore, if you are still confused about choosing the right investment, connect with Savetaxs. Our financial experts will help you in opting for the correct NRI investment option as per your investment goals, time horizon, and risk appetite. Additionally, if you want, they can also assist you with your tax planning in India.