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• Under IDCW (with ₹50,000 withdrawn annually), capital gains tax drops to ₹34,000—nearly half.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.