SWPs or Systematic Withdrawal Plans are becoming very popular these days. Just like how you invest small portions in mutual funds through SIPs (Systematic Investment Plans), SWPs enable you to take out a specific amount from your fund at regular intervals.
Most people tend to opt for this scheme upon retirement when they want a steady income rather than a lump-sum amount.
How are returns from SWPs taxed?
The money you receive from a SWP is not entirely treated as profit. It consists of two parts:
- Capital Gains: The profit you make from capital appreciation on your mutual fund units.
- Return of Capital: The part of the sale amount that equals your original investment/cost of acquisition.
Quite obviously, you only pay tax on the capital gains part.
Now, the tax rate depends on the type of mutual fund and the holding period.
Let’s take an example.
Say you invested ₹10L into an equity MF in 2015 at an NAV of ₹100 per unit. Now, you wish to start an SWP from next FY where you withdraw ₹20,000 monthly.
- Investment amount: ₹10 Lakhs
- Purchase year: 2015 @NAV of ₹100/unit
- Units purchased: ₹10,00,000 / ₹100 = 10,000 units
- SWP start date: April 2025
- SWP amount: ₹20,000 per month
Here’s how the capital gains will be calculated.
So for FY 2025-26, your total capital gains will be ₹1,48,980. As the holding period is more than 12 months, the gains will be classified as long-term and taxed at 12.5%. You’ll also be eligible for ₹1.25L exemption and only the gains exceeding this amount will be taxable.
If you invest in an equity MF and hold it for more than 12 months, the gains are considered long-term and are taxed at a lower rate (12.5%) compared to other sources of passive income like dividend and interest income, which are taxed at your slab rate. For individuals in the highest tax bracket, this can go up to 30%.
Does SWP mean endless passive income?
See, once you have a sizable corpus which grows at a higher rate than your rate of withdrawal, your corpus might never deplete. Like in our above example, if you withdraw ₹20,000 from your corpus every month, and raise this amount by 6% every year to account for inflation, this is how your corpus will look assuming 12% returns every year.
Note: The return is calculated based on the balance corpus amount at the end of the year.
So, even after withdrawing a total of ₹31.6L over the next 10 years, your corpus would still be at ₹25L.
But this is an ideal case. In reality, a lot would depend on how much money you are withdrawing, the market performance and even your initial corpus amount.