Systematic Withdrawal Plan (SWP) is a mutual fund withdrawal option that enables investors to withdraw a fixed amount of money at regular intervals from their investment. It is a smart way to create a steady cash flow while keeping the remaining funds invested and potentially earning returns.

How SWP Works

When you set up an SWP, a fixed amount is deducted from your mutual fund investment at a chosen frequency (monthly, quarterly, or yearly), and the corresponding units are sold based on the fund’s Net Asset Value (NAV) at the time of withdrawal.

For example, if you have invested ₹10 lakhs in a mutual fund and set up an SWP of ₹10,000 per month, the mutual fund will redeem units worth ₹10,000 each month and transfer the amount to your bank account.

Benefits of SWP

1. Regular Income:
   • Suitable for retirees or individuals who need a steady income stream.
   • Helps manage monthly expenses without liquidating the entire investment.
2. Capital Appreciation:
   • The remaining invested amount continues to grow over time.
   • Helps balance withdrawals with potential growth.
3. Tax Efficiency:
   • Compared to traditional fixed deposits, SWPs tends to be more tax-efficient, especially in equity mutual funds as long-term capital gains (LTCG) enjoy preferential tax treatment.
   • Withdrawals from equity funds held for more than one year are tax-free up to ₹1.25 lakh per financial year.
4. Flexibility:
   • You can choose the withdrawal amount, frequency, and duration as per your needs.
   • Can be stopped or modified at any time.
5. Better than Dividend Payouts:
   • Unlike dividends, which are unpredictable, SWPs provide a fixed and steady income.
   • Allows better financial planning.
6. Hedge Against Inflation:
   • Provides inflation-beating returns over time, especially if invested in equity funds.

Types of Funds Suitable for SWP

1. Equity Funds:
   • Good for long-term investors looking for growth with periodic withdrawals.
   • Can provide inflation-adjusted returns.
2. Debt Funds:
   • Suitable for conservative investors who prefer lower risk and steady returns.
   • Provides stable income with lower volatility compared to equity funds.
3. Hybrid/Balanced Funds:
   • A mix of equity and debt for moderate risk and consistent returns.

Tax Implications of SWP in India:

• Equity Mutual Funds (Investment in stocks ≥ 65%)
  • Short-Term Capital Gains (STCG): If units are sold within one year, a 20% tax (effective from 23rd July 2024) applies on gains. For example: If you withdraw after 6 months and have a capital gain of ₹50,000, it will be taxed at 20%. [Section 111A]
  • Long-Term Capital Gains (LTCG): If units are sold after 1 year, tax-free up to ₹ 1,25,000 per year, beyond which a 12.50% (with effect from23^rd July 2024) tax applies. For example: If you withdraw ₹2 lakhs after 1 year, the first ₹1.25 lakh is tax-free, and the remaining ₹0.75 lakh is taxed at 12.50%. [Section 112A]
• Debt Mutual Funds
  • Short-Term (Holding < 2 years): Gains taxed as per your income tax slab.
  • Long-Term (Holding > 2 years): Gains taxed at 20% after indexation upto 31.03.2023.
• NOTE: With effect from 1st April 2023 – All Debt mutual funds purchased after 1st April 2023 shall be treated as short term and taxable at slab rate irrespective of its holding period.

Tax Planning Tips for an SWP

• Hold investments for the long term (1 year for equity funds) to reduce tax liability.
• Plan withdrawals within the ₹1.25 lakh LTCG exemption limit to pay zero tax on equity funds.

Who Should Opt for SWP?

• Retirees: To generate a monthly income from retirement savings.
• Salaried Individuals: To supplement their regular income with additional cash flow.
• Investors with Long-Term Corpus: To create a passive income source without withdrawing the entire investment.
• Parents for Children’s Expenses: For education or other recurring needs.

How to Start an SWP

1. Choose the Right Mutual Fund: Select based on your risk profile and goals.
2. Decide the Withdrawal Amount & Frequency: Based on monthly expenses or financial needs.
3. Submit SWP Request: Apply through the mutual fund platform or advisor.
4. Monitor and Review: Keep track of withdrawals and market performance

Example of SWP Calculation

Suppose you invest ₹10,00,000 in a mutual fund with an average return of 15% per annum, and you withdraw ₹10,000 monthly:

• In the first month, ₹10,000 will be withdrawn, and the remaining amount will continue earning returns @ 15% per annum
• Over time, despite your monthly withdrawals, your investment will continue to grow due to the compounding effect.

Difference between SWP and SIP

Feature	SWP (Systematic Withdrawal Plan)	SIP (Systematic Investment Plan)
Purpose	Withdrawal of fixed amount	Investment of fixed amount
Cash Flow	Generates regular income	Builds wealth over time
Suitable For	Retirees, passive income seekers	New investors, goal-based savings
Taxation	Tax on capital gains	No tax until redemption or switching between funds

Key Points to Remember

• SWP does not guarantee returns since mutual funds depend on market performance.
• It’s best to choose funds with lower risk if you want stable income.
• Plan withdrawals wisely to avoid running out of money too soon.

Conclusion:

SWP is an excellent financial planning tool for those who need a consistent income while keeping their savings invested and growing. It provides flexibility, tax benefits, and better returns compared to traditional savings options like fixed deposits. However, investors should carefully choose funds based on their risk appetite and financial goals. If you’re planning for retirement or passive income, an SWP can be a smart strategy to manage your finances efficiently.

Author
Ms. Nikita Bhandwalkar
Article Intern
Pavan Goyal and Associates (Chartered Accountants)
Office No. B212, GO Square, Mankar Chowk, Wakad, Pune 411057
Email: office@goyalca.com
Contact: 9762763351