A systematic withdrawal plan (SWP) from a mutual fund can deliver regular income with tax efficiency. An SWP is the mirror image of a systematic investment plan (through which investments are made regularly).
With an SWP, one can withdraw a fixed amount every year from a mutual fund. An SWP can be set up in any mutual fund scheme. However, the tax benefits are maximised if it is a fund with less than 65% in debt. Such funds attract 12.5% long-term capital gains tax after one or two years, depending on the extent of equity in the fund.
For example, you can withdraw ₹30,000 per month via an SWP from an amount of ₹50 lakh invested – an 8% withdrawal rate. The SWP may deplete the fund slower or faster, depending on the returns. In the long term, equity is assumed commonly to deliver a return of 12%. If you set the SWP rate well below 12%, your corpus may not erode over time.
A major benefit of SWP is tax efficiency. Every withdrawal is considered part-capital and part-return and hence not fully taxed. If you withdraw ₹5 lakh from a ₹50 lakh investment, it may be that only ₹1 lakh is a taxable gain and the rest is considered capital return and not taxed. This cuts down the effective tax payable compared with fixed deposits, for example.
What makes SWP suitable for retirees?
Harshad Chetanwala, co-founder of MyWealthGrowth.com, explains that an SWP is particularly useful for clients in the post-retirement phase, offering them a way to withdraw money from their portfolio in a structured manner while maintaining an appropriate asset allocation.
A higher withdrawal amount might seem appealing. However, Chetanwala emphasises the importance of reviewing and adjusting this amount regularly.
“Many retirees overestimate their expenses at first, but a realistic assessment a few months into retirement often leads to adjustments,” he says. He recommends reviewing the SWP amount after a few months to match the actual requirements.
Beating inflation
When planning for retirement, most people account for inflation until the point they retire, but they often overlook how inflation will continue to impact their expenses during their retirement years. This is where an SWP becomes more helpful because you can increase the SWP amount each year.
As an example, if Mr Sharma starts withdrawing ₹75,000 per month post-retirement, this amount might be sufficient in the early years. However, with inflation, his cost of living could increase to ₹1 lakh per month in a few years. With an SWP, his withdrawals can be adjusted periodically, helping him keep up with inflation and ensuring his retirement corpus lasts longer.
Amol Joshi, founder at PlanRupee Investment Services, illustrates the importance of long-term perspective in using SWP. Drawing on examples from previous market crashes such as the 2008 financial crisis and the covid-19 pandemic in 2020, he points out that investors with a long-term horizon have typically seen their portfolios recover and beat inflation over time.
This resilience is essential for retirees like Mr Sharma who rely on their portfolios to support them for decades.
Managing risk
Joshi advocates a “bucketing strategy” to manage risk. For instance, Mr Sharma could divide his ₹2 crore corpus into three segments:
₹60 lakh (30%) in debt or hybrid funds with minimal equity exposure
₹60 lakh (30%) in equity-oriented funds
₹80 lakh (40%) in fully equity funds
Typically, financial planners ask retirees to start withdrawing from the first bucket, then the second and then the third. This gives time for the equity component to compound and grow.
By following this strategy, the immediate withdrawals are protected from market volatility, while the equity portions can grow over the long term. Even if the equity markets decline significantly, the debt component will remain unaffected. Hybrid funds may experience a smaller drop due to a lower equity component and thus won’t affect the SWP from the first bucket during the initial period.
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Planning well in advance
Joshi strongly emphasises that retirees should start planning their SWP strategy 2-3 years before retirement, allowing enough time to set up a well-constructed portfolio. This will protect them against sudden market falls that can wipe out many years of gains.
This approach can also facilitate tax optimisation, enabling benefits from long-term capital gains tax rates when withdrawing from equity investments. In the long run, it also avoids rushed decisions.
“Waking up on your 60th birthday and rushing into an SWP isn’t ideal,” Joshi says. Instead, proper planning ensures that inflation-adjusted withdrawals will sustain your lifestyle throughout retirement.
Tailoring SWPs to individual needs
A one-size-fits-all withdrawal rate, like the popular 4% withdrawal rule, isn’t always suitable in the Indian context. Joshi explains that they were developed in the US, where the market returns and inflation rates differ.
According to Joshi, professional guidance can help determine the most appropriate withdrawal rate, adjusting it over time as one’s financial circumstances evolve. This will ensure that the corpus lasts as long as needed, without compromising on the post-retirement quality of life.
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Fund recommendations and tax implications
Harsh Roongta, a registered investment advisor, recommends setting up SWPs in balanced or equity savings funds. He also suggests multi-asset funds that diversify your money across equity, debt, commodities and overseas securities.
On the tax front, a key benefit of an SWP is the ability to defer taxes. Mr Sharma, who withdraws ₹75,000 each month, doesn’t pay tax on the full amount—only the part that represents his investment gains is taxed. The rest, which is his original investment, is tax-free.
Additionally, taxes are calculated using the first-in, first-out method. This means the money Mr Sharma withdraws is considered to come from his earliest investments first. If he invested ₹1 lakh in 2014 and another ₹1 lakh in 2015, the ₹75,000 withdrawal will be taxed based on the gains from his 2014 investment. This approach helps him postpone paying taxes on his newer investments.
Final thoughts
For someone like Mr Sharma, an SWP offers a reliable and customisable way to generate income from investments while managing both risk and tax implications. As Chetanwala advises, regular monitoring of withdrawals is essential.
Joshi’s bucketing strategy ensures that Mr Sharma’s portfolio is protected from market volatility, while Roongta’s recommendations on fund selection and tax strategy help optimise post-retirement income.
Ultimately, an SWP serves as a powerful tool for retirees, offering flexibility, tax efficiency and steady income—all crucial for a peaceful and financially secure retirement.
