In a systematic withdrawal plan, tax falls only on the gain inside each withdrawal, at equity rates when the fund keeps at least 65% in Indian shares. For Hema, drawing ₹60,000 a month from ₹1.5 crore, that is about ₹21,200 a year, against ₹81,120 if the same ₹7.2 lakh came to her as FD interest. The table below shows where the FD wins.
How is each SWP withdrawal taxed?
An SWP, the usual way to take a monthly income from mutual funds, tells a fund to sell units worth a fixed sum on a set date each month. Within each scheme, the oldest units go first (first in, first out). The taxable gain is the withdrawal minus what those units cost; the rest is your own money, untaxed.
For an equity-oriented fund, one with at least 65% in listed Indian shares, units held over 12 months pay 12.5% on long-term gains above ₹1.25 lakh a year (rates since 23 July 2024), a limit shared across all your listed equity gains (section 112A of the 1961 Act, section 198 of the 2025 Act). Units held 12 months or less pay 20%. Add 4% cess. With the oldest sold first, an SWP rarely reaches short-term units.
An aggressive hybrid fund keeps 65% to 80% in equity and is taxed as equity when at least 65% is in Indian listed shares; other hybrids are covered in how mutual fund gains are taxed.
What does Hema pay on ₹60,000 a month?
Hema, 58, retired in early 2026 from a ₹40 lakh job. She holds ₹1.5 crore in an equity index fund and an aggressive hybrid fund taxed as equity. She put the ₹90 lakh in as one lump sum in each fund in 2019 and has added nothing since, so every unit in a fund cost the same, and she draws from both in proportion to their value. Each withdrawal is therefore 40% gain at today's prices (₹60 lakh of ₹1.5 crore). Her deposits pay her ₹6,00,000 a year of interest.
Her SWP tax for FY 2026-27:
- Withdrawals: ₹60,000 x 12 = ₹7,20,000
- Gain inside them: 40% = ₹2,88,000; her own money: ₹4,32,000
- Above the ₹1,25,000 exemption: ₹1,63,000
- At 12.5%: ₹20,375; with 4% cess: ₹21,190
That is about 2.9% of what she draws. Her interest uses up the ₹4 lakh on which no tax is due, and the rebate on income up to ₹12 lakh never covers tax on these gains.
Had the same ₹7,20,000 come as more FD interest, all of it would be income, lifting her to ₹13.2 lakh and past the rebate: ₹78,000 of tax, ₹81,120 with cess. That compares tax on equal cash, not the plans: the FD's deposit, over ₹1 crore, stays whole, while ₹4.32 lakh of each year's SWP is her own money.
The 40% depends on her lump sum. Had she built the ₹90 lakh through SIPs, the first units sold would be the oldest and cheapest: at, say, a 70% gain share, the same year costs ₹49,270, and the share falls as the SWP reaches newer units.
Does an SWP beat FD interest at every income?
No. Extra tax on ₹7.2 lakh a year by other taxable income (new regime, FY 2026-27, 40% gain share):
| Other taxable income | Tax on the SWP | Tax if it were FD interest |
|---|---|---|
| Nil | Nil | Nil |
| ₹4 lakh | ₹21,190 | Nil |
| ₹5 lakh | ₹21,190 | ₹20,800 |
| ₹6 lakh (Hema) | ₹21,190 | ₹81,120 |
| ₹12 lakh | ₹83,590 | ₹1,91,360 |
| ₹16 lakh | ₹21,190 | ₹1,66,400 |
| ₹24 lakh | ₹21,190 | ₹2,24,640 |
Two rules shape the rows. Any unused part of the ₹4 lakh nil slab comes off the gain first, so with other income up to about ₹2.37 lakh the SWP costs nothing, and at ₹3 lakh about ₹8,190. Interest is covered by the rebate while total income stays within ₹12 lakh, and the gain never is: up to about ₹5 lakh of other income, the FD route costs no more. Above that, every extra rupee of interest pays the slab, while the SWP's tax stays at ₹21,190 until total income, the gain included, passes ₹50 lakh (about ₹47 lakh of other income), where a 10% surcharge starts on the whole tax.
One exception: the gain counts towards the ₹12 lakh rebate test, so between about ₹9.3 lakh and ₹12.7 lakh of other income it also ends the rebate on the rest, as the ₹12 lakh row shows.
How long will ₹1.5 crore last at ₹60,000 a month?
₹7.2 lakh is 4.8% of ₹1.5 crore. Taken at the start of each year and raised with prices, the ₹1.5 crore lasts about 23 years if it earns 1% a year above inflation, 27 at 2% and 32 at 3% (October 2026 assumptions, not forecasts). At 2%, Hema's money runs out at about 85.
If the tax also comes from the funds, she draws about ₹61,900 a month, a 4.9% start, and the years fall to 22, 25 and 30. A flat ₹60,000, never raised, buys about half as much after 12 years of 6% inflation.
The retirement planning guide uses a 3% to 3.5% start, planning to 85; lower starting rates are worked in 25x or 33x of spending. A fall in the first years shortens every figure, as sequence of returns risk shows; making savings last from 60 to 85 builds the full income plan.
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Frequently asked questions
This is general information for salaried individuals in India, not personalised financial advice.
