Udayan Adhye Explains How To Earn ₹12 Lakh From Mutual Funds With Zero Tax

Finance influencer Udayan Adhye shares a smart and often overlooked strategy that can help investors earn up to ₹12 lakhs a year from mutual funds while potentially paying zero tax, if used correctly. While Systematic Withdrawal Plans (SWP) are the more popular route for regular income, Udayan highlights how opting for IDCW (Income Distribution cum Capital Withdrawal) can offer a tax-efficient alternative under specific conditions.

Understanding SWP vs IDCW:

Most investors default to SWP for predictable monthly income. However, SWP withdrawals are treated as capital gains, meaning every transaction could attract tax depending on the holding period and gains. IDCW, on the other hand, pays out distributions that are taxed as regular income. This distinction becomes crucial when planning tax efficiency, especially for those targeting lower tax brackets.

How Zero Tax Is Possible:

The strategy works by leveraging the Section 87A rebate. If your total annual income, including IDCW payouts, remains under ₹12 lakhs, your tax liability can effectively be reduced to zero under current rebate rules. This makes IDCW an attractive option for individuals with limited or no additional income streams, as the payout doesn't automatically trigger capital gains taxation like SWP.

Important Caveats to Consider:

While IDCW may sound appealing, it's not without drawbacks. Unlike SWP, where withdrawals can be structured and predictable, IDCW payouts depend on fund performance and are not guaranteed. Additionally, the Net Asset Value (NAV) of the fund drops after each payout, which affects overall returns.

Another factor to keep in mind is Tax Deducted at Source (TDS). If IDCW income exceeds ₹5,000 per Asset Management Company (AMC), TDS may be applied. However, investors can claim this back while filing their income tax returns, provided their final tax liability is zero.

Who Should Use This Strategy:

This approach is best suited for retirees, homemakers, or individuals on a career break who have minimal taxable income. For them, IDCW can act as a steady income stream without increasing tax burden, if planned wisely.

Use It Strategically, Not Emotionally

The key takeaway from Udayan Adhye's insight is simple: IDCW is a tool, not a shortcut. When used thoughtfully, it can enhance tax efficiency. But chasing it without understanding its mechanics can impact long-term wealth creation.

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