People often avoid SWPs because they assume every withdrawal is taxed in full, like FD interest. It isn’t. Once you see how SWP tax works, it’s one of the main reasons people use SWPs for a monthly income.
This explains the rules as we understand them at the time of writing (financial year 2026–27). Tax rules change, and your situation may differ, so check with a tax professional before you act.
The key idea: you’re selling units, not earning interest
When you withdraw through an SWP, the fund sells some of your units to pay you. Tax applies only to the gain on those units: the difference between what you paid for them and what they’re sold for.
Compare that with an FD, where every rupee of interest is added to your income and taxed at your slab rate.
Which units get sold first?
Units are sold first in, first out (FIFO). If you invested in different months, the oldest units are sold first. That matters because how long you’ve held each unit decides whether its gain is short-term or long-term.
The rates, by type of fund
| Type of fund | Held for | Gains are | Tax |
|---|---|---|---|
| Equity-oriented (at least 65% in Indian equity) | Up to 12 months | Short-term | 20% |
| Equity-oriented | Over 12 months | Long-term | 12.5% on gains above ₹1.25 lakh a year |
| Debt funds bought on or after 1 April 2023 | Any period | Taxed as income | Your slab rate |
| Debt funds bought before 1 April 2023 | Over 24 months | Long-term | 12.5%, no indexation |
| Many other funds (for example some hybrid, gold and international funds) | Over 24 months | Long-term | 12.5% |
Cess and any surcharge are added on top. Some categories have their own rules, so check how a specific fund is taxed before you invest.
Worked example 1: equity fund
Say you invested ₹60 lakh in an equity-oriented fund three years ago. It’s now worth ₹84 lakh, and you start an SWP of ₹50,000 a month, so ₹6 lakh this year.
- Gains are 24 ÷ 84, about 28.6%, of every withdrawal.
- Gains in the ₹6 lakh: about ₹1,71,400.
- All units were held over 12 months, so these are long-term gains.
- The first ₹1,25,000 is tax-free. Taxable: about ₹46,400.
- Tax at 12.5%: about ₹5,800, plus cess.
That’s an effective tax of about 1% on the SWP, against 30% on FD interest.
Worked example 2: debt fund
Now say the same ₹6 lakh comes from a debt fund bought after April 2023, again with gains making up about 28.6% of each withdrawal.
- Gains: about ₹1,71,400, taxed at your slab rate.
- In the 30% slab: about ₹51,400 in tax.
That’s more than the equity example, but still far less than FD interest, because only the gains are taxed, not the whole ₹6 lakh.
Why tax is low early on and rises later
In the first years of an SWP, most of each withdrawal is your own money. As your savings grow over time, a larger share of each unit’s value is gains, so the taxable part of each withdrawal slowly rises.
Five ways to keep SWP tax low
- Wait 12 months before drawing from equity funds, so gains are long-term (12.5%, with the ₹1.25 lakh exemption) rather than short-term (20%).
- Use the ₹1.25 lakh exemption every year. It doesn’t carry forward, so if you don’t use it, you lose it.
- Choose the growth option, not IDCW. IDCW payouts are taxed in full at your slab rate.
- Plan which fund you draw from. Drawing from equity and debt in the right order can change your tax a lot. Your expert can work this out for your portfolio.
- Watch exit loads. Some funds charge a fee for selling within a set period, usually a year for equity funds.
Do you need to file anything?
Yes. Capital gains from SWPs must be reported in your income tax return. Your fund house or registrar can give you a capital gains statement for the year that shows the short-term and long-term gains. For resident individuals, no TDS is deducted on these gains, so plan for any tax due.
In short
An SWP isn’t taxed like FD interest. You’re taxed only on the gains, often at long-term rates, and the ₹1.25 lakh exemption can cover a good part of an equity SWP. For anyone in a higher tax slab looking for a monthly income, that difference is large. See it in action in SWP vs FD for monthly income, or test the numbers in our SWP calculator.
