Dividend (IDCW) payouts from mutual funds are fully taxable in the investor's hands at their applicable income tax slab rate — for both equity and debt fund IDCWs.
Prior to 2020, mutual fund dividends were tax-free in the investor's hands (DDT was paid by the fund). From April 1, 2020, this changed: all IDCW (formerly dividend) payouts are treated as income and taxed at the investor's applicable slab rate. Additionally, if total dividend from a fund house exceeds ₹5,000 in a financial year, the AMC deducts 10% TDS before paying. The investor then settles their actual tax liability at the applicable slab rate when filing returns.
Before 2020, mutual fund dividends were effectively tax-free for investors (the fund paid tax before distributing). From FY2020–21, dividends are added to your income and taxed at your slab rate — the same as salary income. If you're in the 30% tax bracket, every ₹100 of dividend income costs you ₹30 in tax. This makes IDCW (payout option) substantially less tax-efficient than the Growth option, where no tax applies until you redeem and can use the 12.5% LTCG rate after 12 months.
IDCW payout goes to your bank account.
If IDCW from a single AMC exceeds ₹5,000/year, 10% TDS is deducted upfront.
Tax liability = IDCW amount × your tax slab rate (10%, 20%, or 30%).
Report in 'Income from Other Sources' or 'Business Income' in your ITR.