A systematic withdrawal plan, or SWP, is a structured way to draw money from your mutual fund investments. It works as the opposite of a systematic investment plan (SIP). Instead of investing at regular intervals, you withdraw a fixed amount at a set frequency. SWPs are especially useful for a steady cash flow without redeeming the entire investment at once.
Setting up an SWP is direct. You select a mutual fund you already hold, decide the withdrawal amount, and choose how often you want the money—monthly, quarterly or annually. Once the SWP starts, the fund redeems the required number of units and transfers the money to your bank account. The remaining units stay invested.
Behind this simple process is an important rule: FIFO, or first in, first out. Every withdrawal under an SWP sells the earliest-purchased units first. This rule affects taxation because the tax rate depends on how long each unit has been held.
View Full Image
For equity mutual funds, units sold after 12 months count as long-term and the gains are taxed at 12.5% over and above the first ₹1.25 lakh of annual long-term gains. Units sold within 12 months attract a 20% short-term capital gains tax. Since FIFO sells older units first, many withdrawals end up falling under the long-term category for investors who have been invested for a while.
For debt funds, all capital gains are taxed according to the investor’s income slab, regardless of the holding period. There is no indexation benefit. This means SWPs from debt funds may lead to higher tax outgo compared to SWPs from equity-oriented funds.
An SWP does not guarantee that your investment will last indefinitely. Its sustainability depends on how much you withdraw compared to how much the fund earns. If the withdrawal amount is higher than the fund’s average return, the number of units will keep reducing, and the corpus will come down over time. If the withdrawal is moderate, the investment may continue to support regular payouts over a longer period.
Another feature of SWPs is flexibility. You can change the withdrawal amount, stop the plan, or redeem the remaining units at any time. There is no lock-in unless the fund itself has one, such as an ELSS (equity-linked saving scheme) with a three-year lock-in.
About the Author
