SWP in Mutual Funds: How a Systematic Withdrawal Plan Works, and When Borrowing Against Your Funds Is Better

A systematic withdrawal plan (SWP) pays a fixed amount from a mutual fund at regular intervals, usually monthly, by selling the units needed for each payout. The units you do not sell stay invested. A loan against mutual funds gives you cash without selling, but the loan has to be repaid, and a fall in the portfolio can force extra collateral or a sale. This guide covers how an SWP works, the tax on each payout, and the situations in which borrowing costs less than selling.

The short answer: use an SWP for regular income from a corpus you are prepared to draw down over years. Use borrowing for a one-off or short-term cash need that you can repay from a known source, and only when the interest cost is lower than the growth and tax you would give up by selling.

How an SWP works

You choose a fund, a payout amount (or a fixed number of units), a frequency, a start date and a bank account. There are two forms. A fixed-amount SWP pays the same sum each month. An appreciation SWP pays only the gains and leaves the original investment alone.

Each payout is a partial redemption. On the payout date, the fund sells the number of units worth the instalment at that day's NAV. If the NAV is ₹10.50, an ₹8,000 payout redeems about 762 units. If the NAV is ₹12, the same ₹8,000 redeems about 667 units. The number of units you hold falls with every payout, and the pace depends on the price.

Exit load applies on top. According to AMFI, the redemption price is the NAV less any exit load. SEBI's illustration uses an equity fund with 1% exit load if redeemed within a year. Units bought on different dates have different holding periods, so a lump-sum SWP can attract exit load in its first year if the scheme charges it.

How you set it up depends on how your units are held. For units in a statement of account, one instruction can cover repeated payouts. For units held in demat form, a SEBI working-group report from February 2026 notes that a one-time SWP instruction is not currently available. Each instalment then needs a delivery instruction, or a power of attorney in favour of a broker.

An SWP does not pay a fixed return. A fixed deposit pays a stated rate for a set term. An SWP's payouts come from selling units at market NAV, so the remaining corpus can grow, stay flat or shrink. There is no single best SWP plan. The right fund category, withdrawal rate and exit-load schedule depend on how much income you need and how long the money must last.

Tax on each withdrawal

Only the gain in each payout is taxed. The part that returns your original investment is not. For each redemption:

Gain = units redeemed × (redemption NAV − purchase NAV of those units)

Units are generally sold first in, first out, so the oldest units go first. Their holding period determines the rate that applies. Current rules for FY 2026-27 are below. Budget 2026 left these rates unchanged, and the Income-tax Act, 2025 applies from 1 April 2026.

Health and education cess of 4% applies on top, and surcharge may apply. Hybrid, gold and international funds follow different rules, so check the scheme's classification before you plan. For resident individuals, SWP payouts generally have no TDS deducted at source; the tax is settled when you file.

Take units bought more than a year ago at NAV ₹10 that now stand at ₹13. An ₹8,000 payout redeems about 615 units. Their cost is about ₹6,154, so the gain is about ₹1,846, or 23% of the payout. In an equity fund, that gain is long-term. If it is your only long-term equity gain for the year, it sits within the ₹1.25 lakh exemption and carries no tax. In a debt fund bought after 1 April 2023, the same gain is taxed at your slab rate. For someone in the 30% slab, including cess, that is about ₹576.

A ₹10 lakh SWP over 10 and 20 years

The model assumes ₹10 lakh invested in one equity-oriented fund at NAV ₹10, a payout of ₹8,000 a month (₹96,000 a year, which is 9.6% of the starting corpus), a constant annual return compounded monthly, no other gains and no exit load. The returns are illustrations, not forecasts. Real returns vary, and a run of poor years early in the plan does more damage than an average return suggests.

At 10%, growth roughly matches the payouts, so the corpus is almost unchanged after 20 years. At 8%, it shrinks to about ₹1.09 lakh. In this model, the corpus lasts exactly 20 years at a return of about 7.7% a year.

Tax in the same scenarios, if the equity fund is the only source of gains:

• Equity fund: the first 12 payouts are short-term, taxed at 20%. That is about ₹780 to ₹1,130 in total across the three return cases. In these runs, each later year's long-term gain stays under ₹1.25 lakh, so the tax is nil.
• Debt fund bought after April 2023, at 31.2% (30% slab plus cess): about ₹91,000 to ₹1.21 lakh over 10 years, and ₹2.94 lakh to ₹3.63 lakh over 20 years.

If the scheme charges 1% exit load within a year, each of the first 12 payouts loses about ₹80, or roughly ₹960 in total.

Borrowing against the same funds

A loan against mutual funds works the other way round. You pledge units to a lender, which marks a lien on them, and you draw cash up to a loan-to-value (LTV) limit. The units stay in your name and remain invested. Interest is charged on the amount you draw, and the loan has to be repaid.

Three consequences matter when you compare it with an SWP.

• No sale, but no SWP on those units. A lien prevents redemption without the lender's consent, so you cannot run an SWP from pledged units until the loan is closed.
• Margin calls. If the pledged value falls and LTV rises above the lender's threshold, the lender can ask for more units, a part repayment or other action. If that does not happen within the timeline, it can redeem units. That redemption is a sale and carries the same tax and exit-load consequences as any other sale.
• Costs and records. Beyond interest, the Key Fact Statement can list processing fees, stamp duty, GST and other charges. Unpaid dues can be reported to credit bureaus.

For scale, RBI's bank lending directions, effective from 1 July 2026, cap LTV at 75% for mutual funds other than debt funds, and at 85% for debt funds. A breach must be fixed within seven working days. These ceilings apply to banks. The limit on any particular loan depends on the lender and the scheme. For a reference point on price, SBI's loan-against-mutual-fund page listed a floating rate of 11.50% p.a. from 1 April 2025. Rates change and differ by lender, so compare the all-in annual cost of the actual offer.

Where BlinkMoney fits

With BlinkMoney Borrow, you can pledge eligible mutual fund units and draw cash without redeeming them. BlinkMoney currently offers borrowing at 9.99% p.a., linked to the RBI repo rate, with a limit of up to 80% of the pledged portfolio value. Treat both figures as indicative. The lender sets the LTV, which can differ by scheme and change over time. The Key Fact Statement, issued before disbursal, governs the rate and charges. Repayment can be interest-only, EMI-based or a bullet payment, depending on the loan documents. The lender is the Lending Partner, currently DSP Finance Private Limited, and BlinkMoney acts as its lending service provider. The Terms of Use set out these arrangements in full.

Pledging is generally not treated as a sale, so creating a pledge does not normally trigger capital gains tax. Whether the interest is deductible depends on the purpose of the loan. Take tax advice before you assume any deduction.

To test your own numbers, the LAMF vs selling calculator compares the tax and growth you would give up by selling against the interest on a loan. Its return and tax inputs are assumptions you can change, not forecasts. If you are still building the corpus, with BlinkMoney Save you can invest from ₹21 a day, and the pause and withdrawal terms are set out in the product documents.

Interest cost against the growth you give up

Selling costs you the tax on the gain and the growth those units would have earned. Borrowing costs the interest, while the units keep growing. Here is ₹1 lakh needed for 12 months, with 30% of the amount sold treated as gain and the loan at 9.99% p.a., simple interest, repaid at the end.

On these assumptions, borrowing is cheaper when the growth you would give up is above about 4% a year for short-term units, and above about 10% a year for long-term units within the exemption. The comparison leaves out fees, and it assumes you repay the principal from other money at the end of the year. Growth is not guaranteed. If the portfolio falls, selling looks cheaper, but the collateral risk of the loan is higher at that point.

When each fits

If the cash need is permanent, neither option fits, and selling is the cleaner answer.

Conclusion

An SWP turns a corpus into monthly cash by selling units. Its tax and exit-load costs repeat with each payout, and its sustainability depends on the return you earn. A loan against the same funds keeps units invested, but the loan must be repaid and can force a sale. For a one-time gap with a clear repayment plan, borrowing can cost less than selling. For regular income, what matters most is whether the corpus can sustain the payouts at a return you can realistically expect.

Sources

Government and regulator

• Reserve Bank of India, Commercial Banks – Credit Facilities directions (LTV ceilings, valuation, breach rectification): https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=13351
• SEBI Investor Education, Exit Load: https://investor.sebi.gov.in/exit_load.html
• SEBI working-group report on SWP/STP facility for units held in demat form (February 2026): https://www.sebi.gov.in/sebidata/commondocs/feb-2026/Annexure%201SWPSTP_p.pdf

Industry body

• AMFI, Tax Regime for Mutual Funds: https://www.amfiindia.com/investor/knowledge-center-info?zoneName=TaxRegimeForMutualFunds
• AMFI, NAV and redemption price: https://www.amfiindia.com/investor/knowledge-center-info?zoneName=NetAssetValueNAV
• AMFI, Understanding Mutual Funds investor booklet (SWP illustration): https://www.amfiindia.com/uploads/AMFIUnderstandingMutualFundsIAPBookletFinalWebsiteversion_860a5b77aa.pdf

Context (secondary)

• Economic Times, Budget 2026 capital gains coverage for FY 2026-27: https://economictimes.indiatimes.com/wealth/tax/capital-gains-tax-heres-how-budget-2026-taxes-shares-gold-and-mutual-funds-in-fy27/derivatives-trading-gets-costlier/slideshow/127853188.cms
• SBI, loan against mutual fund units (rate reference, not linked): SBI Personal Banking, loans against securities page, rate effective 1 April 2025

BlinkMoney

• BlinkMoney Borrow
• LAMF vs selling calculator
• BlinkMoney Terms of Use, version 2.0, last updated 21 May 2026

Disclaimer

This article is for general educational awareness only and does not constitute investment, tax, legal, or financial advice. Market-linked products are subject to risk, and past performance does not guarantee future results. Product eligibility, costs, liquidity, taxation, and terms can change. Review the latest official product documents and consider a suitably qualified professional if you need advice for your circumstances.