SWP: a monthly income from your mutual funds

A Systematic Withdrawal Plan, or SWP, is a SIP in reverse. Instead of putting a fixed amount into a mutual fund every month, you take a fixed amount out. The fund sells just enough units each month to pay you, and the rest of your money stays invested and keeps growing.

It is a popular way to draw a regular income in retirement, or from a large sum such as a gratuity, an inheritance or the sale of a property.

How it works

You choose the fund, the amount and the date, say ₹60,000 on the 5th of every month. On that date the fund redeems units worth ₹60,000 and pays them into your bank account. You can raise, lower, pause or stop the SWP whenever you like, and take out extra money if you need it.

An example

Lakshmi has ₹1 crore and wants ₹60,000 a month. Her money earns an assumed 8% a year.

• After 25 years she has received ₹1.80 crore in total, and about ₹1.36 crore is still invested.
• Her money lasts because she takes out a little less than it earns, on average.

How much you take out decides how long the money lasts. With the same ₹1 crore at 8% a year:

A useful rule: if your yearly withdrawals stay below the yearly return, the money can last a lifetime. Push much beyond it and it runs down faster than most people expect.

Why SWP is often better for tax than FD interest

FD interest is taxed in full, every year, at your slab rate. With an SWP, each withdrawal is partly your own money coming back and partly gain, and only the gain is taxed.

Take Lakshmi's first year. If her ₹1 crore were in an FD paying 7.2%, the ₹7.2 lakh of interest would all be taxable. With an SWP she also receives ₹7.2 lakh, but only about ₹25,000 of it is gain; the rest is her own money. The taxable part grows in later years as the gains build up (about ₹2.1 lakh in year five), but for many years it stays well below what an FD would be taxed on.

How the gain is taxed depends on the fund. For debt funds bought from April 2023, gains are taxed at your slab rate. For equity-oriented funds held over a year, long-term gains above ₹1.25 lakh a year are taxed at 12.5%. Our article on how investments are taxed has the full table.

Things to keep in mind

• Returns are not fixed. Unlike an FD, the fund's value moves with the market. A fall early on, while you keep withdrawing, hurts more than a fall later, because you sell more units at low prices.
• Choose the fund with care. For an SWP, most people use conservative or balanced funds, not pure equity, so the monthly income doesn't depend on a volatile market.
• Keep a cushion. Holding a year or two of withdrawals in a liquid fund means you don't have to sell when markets are down.
• Start after the exit-load period. Many funds charge an exit load if you sell within a year. Starting the SWP after that, or from a fund without one, avoids the charge.
• Review once a year. If the fund has done well you may be able to take a little more; if not, take a little less.

Try your own numbers in our SWP calculator. It shows, month by month, what you receive and what stays invested.