SWP Calculator

Understanding the Systematic Withdrawal Plan (SWP)

As an Indian investor, you have worked hard to save and invest your money. Now you may be approaching retirement, want a fixed income source, or just wish to manage your wealth more efficiently.  A Systematic Withdrawal Plan can be a powerful tool in your financial arsenal. At PaisaForever, we like to arm you with the knowledge to make the best financial decisions and our SWP Calculator is just one of many financial tools we provide for you.

What is a Systematic Withdrawal Plan ?

A Systematic Withdrawal Plan is essentially the reverse of a Systematic Investment Plan. While a SIP helps you invest a fixed amount of money on a regular basis and build a corpus, an SWP allows you to withdraw a fixed amount of money from your mutual fund investment at regular intervals (usually monthly, quarterly, or annually). An SWP is also a disciplined way to derive cash flow from your investments without completely redeeming your lump sum investment. 

How Does SWP Work?

In arranging an SWP, you direct the mutual fund house to redeem a certain number of units from your holding at each selected interval to pay you an agreed amount. The number of units that are redeemed will vary depending on the Net Asset Value (NAV) of the fund at that time. The rest of your remaining units remain invested and therefore, may benefit from market appreciation. SWP provides an organized path to access funds, so you can manage expenses while the core investment remains due to appreciation.

Main Advantages of SWP for Indian Investors: 

• Regular Income: Provides a steady and predictable cash flow to the investor which is ideal to retirees, homemakers and also to anyone who wants an additional income source.
• Taxation: Compared to traditional interest bearing instruments like Fixed Deposits, SWP provides the investor potential tax benefits. The only capital gains portion of your withdrawal is taxable, not the total withdrawal amount. Long term capital gains (LTCG) earned from equity funds have an exemption limit of ₹1 Lakh for the financial year and taxed at 10% thereafter. For debt funds, LTCG (for investments before April 1, 2023 which are held >36 months), the investor will benefit from indexation which reduces the amount of the gains for taxable purposes. For debt funds, investments made on or after April 1, 2023, gain is taxed as per the slab rate of the investor.
• Flexibility: You choose the amount you withdraw, frequency of withdrawals and you can even pause or stop the SWP whenever you feel necessary as your need for cash flow has changed.
• Preservation and Growth of Capital: Since you withdraw only a fraction of the initial investment, your capital has the potential to continue to grow and combat inflation and help your money last longer.
• Rupee Cost Averaging (the other way): By withdrawing fixed amounts, you will sell less units (for more money) at higher NAV and sell more units (for less) when the NAV is at its lowest. Quite the opposite of what most investors do, right? Over the long term it should be beneficial to have your SWP growing when working with volatile market investments.

Who is SWP Appropriate for?

SWP is designed for:

• Retirees who want a pension-like regular income.
• Individuals with a lump sum looking for regular income.
• Individuals who want to manage their living costs in the years after retirement predictably.
• Individuals who want an additional income.

Our PaisaForever SWP Calculator can help you estimate how long your corpus will last and the ideal withdrawal amount to meet your financial goals.

Frequently Asked Questions (FAQs) about Systematic Withdrawal Plan

1. What is the difference between SWP and SIP?

SIP (Systematic Investment Plan) is for investing a fixed amount regularly to develop a corpus. SWP (Systematic Withdrawal Plan) is for withdrawing a fixed amount regularly from an existing mutual fund corpus to generate income.

2. Is SWP only for retired investors?

While SWP is useful for retired investors, who want regular income, it is not exclusive to this group. Any investor who has made a lump sum investment can use an SWP to get a regular cash flow for several purposes – monthly expenses, education expenses for children and other periodic expenses from the same corpus.

3. What types of mutual funds are best for SWP?

In general, for SWP, relatively stable returns and less volatile categories of funds are preferred (especially if income needs are shorter or medium term). This is why Debt funds (liquid funds, ultra-short duration, corporate bond) and Conservative Hybrid funds are often recommended for SWP. Equity-oriented funds may also be used for long-term SWP, but with risk as NAV will vary. It’s definitely good to get advice from a financial advisor.

4. How is the income from SWP taxed in India?

SWP withdrawals are considered redemptions, and the taxation is contingent on whether you incur a capital gain or loss.

• Equity Funds: The tax treatment is as follows. If you have held the units for less than 12 months, Short Term Capital Gains (STCG) of 15% is applicable. If you have held the units for more than 12 months, Long Term Capital Gains of ₹1.25 Lakh in a financial year is exempted from tax. Taxable Long Term Capital Gains in excess of ₹1.25 Lakh in a financial year is taxed at 12.5%.
• Debt Funds: The tax treatment at withdrawal is dependent on the purchase date of the investment. For purchases after April 1, 2023, there is no distinction between short-term and long-term capital gains—all gains are taxed at slab rates without indexation. For purchases before April 1, 2023, the capital gains tax is also dependent on the holding period. If the holding period is less than 36 months, the short term capital gains tax is added to the total income and taxed to the applicable slab. If the holding period is more than 36 months, the Long Term Capital Gains tax is 20% after indexation.

5. Is there TDS on SWP withdrawal?

No, typically resident individual investors incur no Tax deduction at source (TDS) on withdrawals of SWP from mutual funds, however, the capital gains from redemption are taxable to you under the applicable tax laws.

6. Can I change the amount of the SWP or the frequency of it after I have set it up? 

Yes, most mutual fund houses are generally flexible in allowing you to change the withdrawal amount or frequency (example: change from withdrawing monthly to quarterly) to satisfy your changing financial needs over time. Generally, you just need to submit a request to the fund house.

7. What if the market goes down, while I am making an SWP? 

If the market goes down, and you have fewer units because the NAV of your fund is too low, then you will be redeeming more units to satisfy your fixed withdrawal amount from the fund. This will more quickly drain your corpus. Therefore, it is important to choose a fund wisely and maintain a reasonable withdrawal in less favorable times. You can also keep 1-2 years of expenses in liquid or safe funds as a buffer when going through cycles.

8. Can I stop or temporarily pause an SWP? 

Yes, you have the flexibility to stop or pause your SWP at any time by submitting a request to the mutual fund company. As necessary, this is often useful, since you may want to stop or pause when the market is going through volatility or the income needs change.

9. Is there a minimum investment amount required to start an SWP?

Yes, in general SWP schemes will have a minimum investment balance required as part of beginning an SWP. It is important to note that the minimum amount may differ from fund house to fund house and scheme to scheme. You should review the scheme’s offer document or discuss it with a financial advisor to determine the minimum requirement. 

10. What value does the SWP Calculator on PaisaForever provide?

The SWP calculator provides a simple tool for estimating how long your investment corpus may last considering your initial investment, whatever withdrawal amount, expected rate of returns, and factors for inflation. It merely gives you a visual image of your potential regular income to help planning. 

11. Is SWP better than Fixed Deposits for regular income? 

On an average SWP provides better tax efficiency and potential capital appreciation than Fixed Deposits (FD). Issued FD Interest will be fully taxable at your income slab rate, as well as no capital growth, beyond fixed interest. However, the FD does provide guaranteed income, and is relatively sheltered from market risk. Thus, it is for those with a very low appetite for risk. Ultimately the decision will be based on your risk appetites and financial objective.

12. What is the “safe withdrawal rate” for SWP?

A popularly debated concept, the “safe withdrawal rate” is a percentage of your initial corpus you can withdraw every year, without depleting your funds, over the long run (typically, retirement). While there is no historically fixed rate, many financial planners establish a conservative withdrawal rate of 4-5% a year, adjusted for inflation, over the long run, particularly for equities. This varies quite dramatically depending on the market, the fund(s) performance, as well as your individual situation.

Disclaimer: This SWP Calculator is for illustrative purposes only and provides estimated results based on your inputs. It does not constitute financial advice. Mutual fund investments are subject to market risks, and actual returns may vary. Please consult a qualified financial advisor for personalized guidance.