How are SWP (Systematic Withdrawal Plan) withdrawals taxed in India?

A Systematic Withdrawal Plan (SWP) allows you to withdraw a fixed amount regularly from your mutual fund investment, either monthly, quarterly, or yearly. While it gives you a steady income, the withdrawals are not tax-free.

The tax treatment depends on several factors, including the type of mutual fund and the duration of your investment.

So you are taxed only on the gains, not on the amount you originally invested.

The exact tax you pay depends on two things:

• What kind of mutual fund it is (equity, debt, etc.)

• How long have you held the units before they are sold

Tax treatment of SWP withdrawals

According to Ronak Morjaria, Partner at ValueCurve Financial Services, "SWP is nothing but a withdrawal or redemption. The tax will only apply to the profit portion of the SWP. In the initial years, the profit portion is lower, so the tax outgo will also be lower. Over time, as the profit increases, the tax outgo will rise accordingly."

Abhishek Soni, CEO & Co-founder, Tax2win further explains

• You don’t pay tax on the full withdrawal amount.

• Only the capital gains portion (the profit earned) of each withdrawal is taxed, not the entire amount withdrawn.

• If you withdraw from equity mutual funds:

• Short-term (held for less than 1 year): Gains are taxed at 20%.

• Long-term (held for more than 1 year): Gains up to ₹1.25 lakh in a financial year are tax-free. Gains above that are taxed at 12.5% without indexation.

If you withdraw from debt mutual funds:

• For investments made after April 1, 2023, indexation benefits are no longer available.

• All gains, whether short-term or long-term, are now added to your income and taxed as per your slab rate.

Example: SWP from Equity Mutual Fund

• You invest ₹5 lakh in an equity mutual fund.

• After 2 years, you start an SWP of ₹10,000/month.

• Since the units have been held for more than 12 months, each withdrawal results in long-term capital gains (LTCG).

Each ₹10,000 withdrawal contains:

• Capital returned is not taxed

• Profit portion is taxed as LTCG at 12.5% after the ₹1.25 lakh annual exemption

Suppose that of the ₹10,000, ₹ 3,000 is profit; only ₹3,000 is taxed.

The ₹3,000 profit in the example is just an assumed (illustrative) number to show how the tax calculation works. In reality, the profit portion depends on:

• The NAV at the time of SWP withdrawal, and

• The number of units being redeemed.

By understanding these tax implications, you can better plan your SWP withdrawals to optimise your tax liability. Always keep track of the holding period of your mutual fund units and the type of fund you’re invested in, as this will impact how much tax you need to pay on the profit portion of your SWP withdrawals.