Complete Guide to Systematic Withdrawal Plans (SWP)
In the world of financial planning, while SIP (Systematic Investment Plan) is about accumulating wealth, SWP (Systematic Withdrawal Plan) is about effectively utilizing that wealth. It is a smart, tax-efficient way to create a regular income stream from your existing mutual fund corpus.
Whether you are a retiree looking for a pension replacement or an individual seeking a secondary income source, SWP offers a structure that combines the growth potential of mutual funds with the stability of fixed withdrawals.
What is an SWP?
An SWP allows you to withdraw a specific sum of money from your mutual fund investment at regular intervals (monthly, quarterly, or annually). It is the exact reverse of a SIP. In a SIP, you buy units; in an SWP, you sell units.
For example, if you have ₹50 Lakhs in a mutual fund and you set up an SWP of ₹30,000 per month, the fund house will redeem units worth ₹30,000 on a fixed date every month and credit the amount to your bank account.
Why is SWP Better than Dividend Plans?
Many investors traditionally opted for the "Dividend Payout" option for regular income. However, SWP is mathematically and practically superior for several reasons:
- Tax Efficiency: Dividends are added to your taxable income and taxed as per your slab (up to 30%+). In SWP, you only pay tax on the capital gains portion of the withdrawal, which is significantly lower.
- Predictability: Dividends are not guaranteed. A company may choose not to declare dividends in a bad year. SWP gives you a fixed cash flow regardless of market conditions (as long as your corpus lasts).
- Compounding: In SWP, the money you don't withdraw stays invested and continues to grow. In dividend plans, the NAV falls by the extent of the dividend declared, reducing the compounding base.
SWP Taxation Rules (2025 Update)
Understanding taxation is crucial for SWP planning. SWP withdrawals are treated as redemptions. The tax applies only to the profit component, not the principal.
*LTCG on Equity gains is exempt up to ₹1.25 Lakh per financial year.
Smart Withdrawal Strategies
To ensure your corpus outlasts you, you need a strategy. Here are two popular ones:
1. The 4% Rule
This globally accepted thumb rule suggests that if you withdraw 4% of your specific retirement corpus annually (adjusting for inflation), you typically won't run out of money for at least 30 years. For a ₹1 Crore corpus, this means a monthly SWP of roughly ₹33,000.
2. The Bucket Strategy
Divide your corpus into three buckets:
- Bucket 1 (Immediate - 3 Years): Keep this in Liquid Funds or FDs. This fuels your immediate periodic SWP.
- Bucket 2 (Medium Term - 3 to 7 Years): Invest in Hybrid or Balanced Advantage Funds. This bucket refills Bucket 1.
- Bucket 3 (Long Term - 7+ Years): Invest in Pure Equity Funds for high growth. This bucket grows your wealth to fight inflation.