SWP: drawing a monthly income from investments
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What an SWP is
The money comes from your own units. Part of each payment is the money you originally put in, coming back, and part is the growth on it. If the fund grows faster than you withdraw, the balance can keep rising. If it grows slower, the balance shrinks and eventually runs out.
| SIP | SWP | |
|---|---|---|
| Direction | Money in, units bought | Units sold, money out |
| Fixed each month | Rupee amount invested | Rupee amount withdrawn |
| When prices are low | More units bought | More units sold |
| Typical stage | Building savings | Spending from savings |
That third row matters. A SIP buys more units when prices fall. An SWP has to sell more units when prices fall, which is why falls hurt a withdrawal plan more than they hurt someone who is still investing. See what past SIPs became for the building side.
What happens to your units
| Month | NAV | Units sold | Units left | Value left |
|---|---|---|---|---|
| Start | ₹100 | — | 10,000 | ₹10,00,000 |
| 1 | ₹101 | 99.0 | 9,901 | ₹10,00,000 |
| 2 | ₹102 | 98.0 | 9,803 | ₹9,99,900 |
| 3 | ₹95 | 105.3 | 9,698 | ₹9,21,300 |
| 4 | ₹99 | 101.0 | 9,597 | ₹9,50,100 |
In month 3 the price fell, so 105 units had to be sold instead of about 98. Those extra units are gone for good, even after the price recovers in month 4.
How long would it last?
The price grows smoothly at the rate you choose. It is a way to see the arithmetic, not a projection of any fund.
| Year | Taken out that year | Of which gain | Gain share |
|---|---|---|---|
| Year 1 | ₹3,60,000 | ₹12,392 | 3% |
| Year 5 | ₹3,60,000 | ₹1,04,498 | 29% |
| Year 10 | ₹3,60,000 | ₹1,86,109 | 52% |
| Year 20 | ₹3,60,000 | ₹2,79,455 | 78% |
The gain share rises over time because the units sold later were bought at the same price but sell for more. Tax applies to the gain part only; see the tax section below for the rates.
Why only part of each withdrawal is taxed
In the first year ₹3,60,000 is withdrawn. The units sold were bought at ₹100 and sold at ₹100 to about ₹107, so the gain on them is only about ₹12,400. The other ₹3,47,600 is the original money returned, which is not income.
By comparison, ₹3,60,000 of interest from a fixed deposit is interest income in full and is added to your income for tax every year. The two are taxed on different bases, which is why they are not comparable on the headline amount alone.
Units are treated as sold first-in, first-out: the oldest units go first. As the plan runs on, the units being sold have grown for longer, so the gain share of each payment rises. The table under the calculator shows this.
Tax rates on withdrawals
| Fund type | Held | Tax on the gain |
|---|---|---|
| Equity-oriented (65%+ in Indian shares) | More than 12 months | 12.5% on gains above ₹1.25 lakh in a financial year (all long-term equity gains combined) |
| Equity-oriented | 12 months or less | 20% |
| Debt funds bought on or after 1 April 2023 | Any period | Added to income and taxed at your slab rate |
| Other funds (hybrid, international, gold) | Varies | Depends on the fund's mix and holding period; check the fund's documents |
Cess is added on top. Exit loads can apply to units sold within a set period, often the first year. Rules differ for funds bought before the dates above, so check the rules that apply to your own units, or ask a tax professional.
Withdrawals during a fall
This is the same sequence effect described in the 4% rule guide, where a chart shows it. Plans often deal with it by keeping a year or two of withdrawals in a steadier fund and moving money across from the main fund periodically, so that the main fund is not sold heavily straight after a fall.
How much to take out
| Monthly withdrawal on ₹50 lakh | Yearly rate | What the arithmetic needs |
|---|---|---|
| ₹20,000 | 4.8% | Growth near 5% just to keep the balance flat |
| ₹30,000 | 7.2% | Growth near 7% to keep it flat |
| ₹50,000 | 12% | Growth near 12% to keep it flat |
A fund's past return is not a rate that will repeat. A withdrawal rate set equal to a past average return leaves no room for below-average years, and spending that rises with inflation needs even more.
What to check next
- Is the plan's yearly withdrawal below, near or above the growth it assumes?
- Does the withdrawal need to rise with inflation? Try the step-up box above.
- Which tax rules apply to your units: fund type, purchase date, holding period?
- Is there an exit load on recently bought units?
- What happens to the plan if prices fall in the first two years?
This is a general explanation, not a plan for your circumstances. For that, consult a SEBI-registered investment adviser.
Educational explanations only, not investment advice, research or a recommendation to buy, sell or hold any security. Past performance does not indicate future results. Every example uses made-up round numbers. Read the Disclaimer before relying on any figure.