If you've set up a Systematic Withdrawal Plan to generate a monthly "salary" from your mutual fund investments, you've probably wondered: how much of this ₹20,000 or ₹50,000 hitting my bank account every month actually gets taxed? The answer surprises most people — usually in a good way.
With a salary or FD interest, 100% of what you receive is taxable income. With an SWP, each instalment is really the redemption of a small number of units. You only owe tax on the gain embedded in those units — the original capital you invested comes back to you completely tax-free, again and again, instalment after instalment.
| Step | What happens |
|---|---|
| 1. Units redeemed | SWP amount ÷ current NAV = units sold this instalment |
| 2. Cost basis | Units matched to your earliest purchases (FIFO) |
| 3. Gain calculated | (Current NAV − Purchase NAV) × units redeemed |
| 4. Tax applied | Only on the gain, at the applicable capital gains rate |
Because most SWPs are set up on funds held for years, the bulk of instalments usually qualify for the lower LTCG rate — and many retirees find their annual gain stays comfortably under the ₹1.25 lakh exemption, especially in the early years of the SWP when the cost basis is close to the NAV.
Since the 2023 rule change, debt mutual funds no longer get indexation or a special LTCG rate. Gains from debt fund SWPs — regardless of holding period — are added to your income and taxed at your slab rate. This makes debt fund SWPs less tax-efficient than equity ones, though still typically better than an FD, since only the gain (not the whole withdrawal) is taxed.
Suppose you invested ₹10 lakh in an equity fund at NAV ₹50, giving you 20,000 units. Years later the NAV is ₹80. You start an SWP of ₹40,000/month.
| Item | Value |
|---|---|
| Units redeemed this month | 40,000 ÷ 80 = 500 units |
| Original cost of those units | 500 × ₹50 = ₹25,000 |
| Gain (taxable portion) | 500 × (₹80 − ₹50) = ₹15,000 |
| Tax-free return of capital | ₹25,000 |
Out of a ₹40,000 monthly withdrawal, only ₹15,000 is even in the taxable-gain bucket — and that bucket is further shielded by the ₹1.25 lakh annual LTCG exemption if it's an equity fund held long-term. This is a completely different experience from receiving ₹40,000 of fully-taxed interest or salary.
Some investors choose the IDCW (dividend) option instead, thinking it's simpler. But IDCW payouts are added entirely to your taxable income at your slab rate — there's no cost-basis relief at all. For most investors in the 20-30% tax bracket, an SWP from the growth option is meaningfully more tax-efficient than the same amount taken as IDCW.
For the bigger picture on drawing an income from your portfolio, see our related article on SWP vs fixed deposit for retirement income, and if you're still building the corpus, our piece on SIP vs lumpsum investing may help you plan the accumulation phase first.
SWP tax is gentler than it looks on the surface because you're only ever taxed on the gain slice of each withdrawal, not the full amount. Equity SWPs held long-term, paired with the annual LTCG exemption, are one of the more tax-efficient ways to draw a regular income from a mutual fund portfolio — but the exact numbers depend on your cost basis, fund type, and holding period, so it's worth reviewing your specific statement rather than assuming.