Updated 1 October 2026 · 6 min read
How SWP Is Taxed in India (FY 2025-26): Equity, Hybrid and Debt Funds
Short answer
Each SWP instalment is a redemption of mutual fund units, so only the capital gain on the units sold is taxed — at 20% (held ≤12 months) or 12.5% above ₹1.25 lakh a year (held longer) for equity-oriented funds, and at your slab rate for debt funds bought after 1 April 2023.
Rules described are those applicable for FY 2025-26 after the Union Budget 2024 changes, for resident individual investors. Tax law changes — confirm with a tax adviser before acting.
The key idea: you are taxed on gains, not on withdrawals
An SWP does not create “income” in the way FD interest or a dividend does. Each instalment sells units of your fund. Part of the money is your own original investment coming back (not taxable); only the capital gain on those units is taxable.
Example: you bought units at NAV ₹100 and an SWP sells 200 of them at ₹110 to pay you ₹22,000. Your cost is ₹20,000, so the taxable gain is just ₹2,000.
Units are redeemed first-in, first-out (FIFO): the oldest units go first, which matters for deciding whether a gain is short- or long-term.
Equity-oriented funds (65%+ in Indian equity)
This includes equity funds, aggressive hybrid funds, most balanced-advantage funds, arbitrage and equity-savings funds.
| Holding period of units sold | Type | Tax rate |
|---|---|---|
| 12 months or less | Short-term capital gain (STCG) | 20% |
| More than 12 months | Long-term capital gain (LTCG) | 12.5% on gains above ₹1.25 lakh per financial year |
Plus the applicable surcharge and 4% cess. The ₹1.25 lakh LTCG exemption is per person per financial year, across all equity funds and listed shares.
Debt funds
- Bought on or after 1 April 2023: all gains are taxed at your income-tax slab rate, regardless of how long you held the units.
- Bought before 1 April 2023: gains on units held more than 24 months are long-term and taxed at 12.5% without indexation (for transfers on or after 23 July 2024); shorter holdings are taxed at slab rates.
Hybrid funds
Tax depends on the fund’s equity share. Funds holding 65% or more in Indian equity are taxed like equity funds. Funds with less than 35% equity are taxed like debt funds. Funds in between follow specific rules for intermediate equity exposure — check the scheme’s tax classification with your fund house.
Worked example: ₹50 lakh SWP from an equity-oriented hybrid fund
Invest ₹50 lakh at NAV ₹100 in a fund that grows 9% a year, and withdraw ₹29,167 at the start of every month.
| Year | Gain inside the year’s withdrawals | Treatment | Approx. tax |
|---|---|---|---|
| 1 | ₹13,980 | STCG (units < 12 months old) | ₹2,800 + cess |
| 2 | ₹42,798 | LTCG, within ₹1.25 lakh exemption | ₹0 |
| 3 | ₹69,145 | LTCG, within exemption | ₹0 |
| 5 | ₹1,15,253 | LTCG, within exemption | ₹0 |
| 6 | ₹1,35,386 | LTCG, ₹10,386 above exemption | ≈ ₹1,300 |
Over the first six years, ₹21 lakh of income would attract only about ₹4,100 of tax (plus cess). The same income as FD interest in the 30% bracket would cost over ₹6.5 lakh. Compare in detail: SWP vs FD.
How to keep SWP tax low
- Wait 12 months before starting an SWP from an equity-oriented fund, so every redemption is long-term.
- Use the ₹1.25 lakh LTCG exemption every year — couples can each claim it by holding funds in their own names.
- Choose the growth option, not IDCW: IDCW payouts are fully taxable at your slab rate (SWP vs IDCW).
- Mind exit loads — many equity funds charge 1% on units redeemed within a year.
Do you need to file anything?
Yes. Capital gains from SWP redemptions must be reported in your income-tax return (Schedule CG), even when they fall within the exemption. Your registrar (CAMS or KFintech) issues a capital-gains statement each year that lists every redemption.
Plan the withdrawal itself with the SWP calculator for India.