What is SWP in Mutual Funds? Definition, Benefits & Tax Rules

Q: What is SWP in Mutual Funds? Definition, Benefits & Tax Rules

Learn what SWP in mutual funds is, how it works, its benefits, and tax rules. A simple, beginner-friendly guide to creating a regular income from investments.

vanshusharma710
Sep 10
3 min read

Updated: Sep 11

What is SWP in Mutual Funds Definition, Benefits & Tax Rules

When we invest in mutual funds, the usual approach is to put in money and let it grow. But what if you want a regular income from your investments without redeeming the entire amount?

That’s where SWP (Systematic Withdrawal Plan) comes in, a simple, smart, and flexible way to withdraw a fixed amount from your mutual fund investments every month, quarter, or year.

In this article, we’ll understand what SWP is, how it works, its benefits, and the tax rules you must know.

What is SWP in Mutual Funds?

SWP stands for Systematic Withdrawal Plan. It’s an investment option offered by mutual funds where you withdraw a fixed amount at regular intervals from your existing investment.

Think of it as the opposite of SIP:

In SIP → You invest regularly.
In SWP → You withdraw regularly.

Example: Let’s say you have invested ₹10 lakh in a mutual fund. You set up an SWP to withdraw ₹10,000 every month.

Each month, ₹10,000 will be credited to your bank account.
The remaining balance continues to stay invested and grows with market returns.

This makes SWP ideal for retirees, freelancers, and anyone looking for a steady income stream.

How Does SWP Work?

The process is quite simple:

You Invest: First, you invest a lump sum in a mutual fund.
Set SWP Amount & Frequency: Decide how much you want to withdraw and how often (monthly, quarterly, yearly).
Automatic Withdrawals: The mutual fund deducts the chosen amount and sends it to your bank account.
Balance Keeps Growing: The rest of your investment continues to earn returns.

Pro Tip: Choose funds that are less volatile, like hybrid funds or debt-oriented funds, if your goal is stable income.

Key Benefits of SWP

1. Regular & Predictable Income

SWP gives you consistent cash flow — perfect for managing monthly expenses.

2. Better Tax Efficiency

Unlike fixed deposits where the entire interest is taxable, in SWP, only the redeemed units are taxed. Plus, if your investment is older than 3 years, you get indexation benefits.

3. Power of Compounding

Even though you withdraw regularly, your remaining money keeps growing because it stays invested.

4. Protection Against Market Volatility

Instead of redeeming your entire investment during a market dip, SWP lets you withdraw small amounts, reducing risk.

5. Flexible & Customizable

Choose the amount you want
Select withdrawal frequency
Pause, increase, or reduce withdrawals anytime

SWP vs SIP vs Lumpsum: Quick Comparison

Feature	SWP (Withdraw)	SIP (Invest)	Lumpsum (One-Time)
Objective	Regular income	Wealth creation	Long-term growth
Cash Flow	Money out	Money in	No regular cash flow
Best For	Retirees, Freelancers	Salaried Investors	Investors with surplus
Taxation	On withdrawn units	On redemption	On redemption

Tax Rules for SWP in Mutual Funds

When you withdraw money through SWP, you’re redeeming your mutual fund units, and that attracts capital gains tax. Here’s how it works:

1. For Equity Mutual Funds

If held < 1 year:Tax = 15% (Short-Term Capital Gains)
If held > 1 year:Tax = 10% on gains above ₹1 lakh (Long-Term Capital Gains)

2. For Debt Mutual Funds

For investments before April 1, 2023:
- < 3 years: Taxed as per your income slab (Short-Term)
- ≥ 3 years: 20% tax with indexation benefits
For investments after April 1, 2023:No indexation benefit → Gains taxed as per your income slab.

Pro Tip: To reduce tax liability, set up an SWP only after completing 1 year in equity funds and 3 years in old debt funds.

Who Should Invest in SWP?

SWP is ideal for:

Retirees → To generate monthly income
Freelancers & Business Owners → For cash flow stability
Goal-Based Investors → If you need a fixed income after a specific period

If you want steady income and tax efficiency without fully redeeming your investments, SWP is one of the best strategies.

Final Thoughts

SWP in mutual funds is a smart way to create regular income while keeping your money invested. It’s flexible, tax-efficient, and easy to set up. However, always choose the right fund type and withdrawal amount to avoid exhausting your investment too early.

If used wisely, SWP can help you maintain financial stability, especially after retirement or when you need predictable income.