Earn under ₹12 lakh? PPFAS lets you withdraw mutual fund gains tax-free with IDCW trick

Investors in the PPFAS Flexi Cap Fund can now legally save on taxes if their annual income falls below ₹12 lakh. Thanks to a tweak in budget rules and a smart use of IDCW (Income Distribution cum Capital Withdrawal), the fund’s new structure opens a tax-free income route, especially for low earners and senior citizens.

The opportunity arises from the Budget 2024 announcement that income up to ₹12 lakh will be tax-free under the new regime. While capital gains from mutual funds—long-term (LTCG) at 12.5% and short-term (STCG) at 20%—remain taxed regardless of income level, IDCW is treated differently: it’s taxed as normal income.

This means that if your total income, including IDCW payouts, stays under ₹12 lakh, you could pay zero tax.

Starting October 31, PPFAS Flexi Cap Fund investors can choose the IDCW option. In a standard growth plan, returns are taxed when you redeem. In contrast, IDCW (especially the payout version) allows partial tax-free withdrawal each year, ideal for those in lower tax brackets.

Here’s how it works:

• Assume an investor earns ₹11 lakh annually and invests ₹10 lakh in the fund.
• Under the growth option, after five years, they would pay ₹65,600 in capital gains tax.
• Under IDCW (with ₹50,000 withdrawn annually), capital gains tax drops to ₹34,000—nearly half.

If the IDCW is taken as a payout (and not reinvested), and the total income stays under ₹12 lakh, no tax applies on the withdrawal. That’s a clear win for senior citizens and low-income investors looking for efficient income generation.

Do note:

• IDCW payouts are not guaranteed.
• If payouts exceed ₹10,000 annually, TDS applies (unless Form 15G/H is filed).
• Existing investors must sell and reinvest to opt for IDCW.

The scheme’s investment strategy remains unchanged, PPFAS clarified.