Decoding Regular Income from Mutual Funds: SWP vs. Dividend Option

Decoding Regular Income from Mutual Funds: SWP vs. Dividend Option

Imagine you’ve retired, and you’re looking to make your savings work for you. You’ve heard about mutual funds, which offer two ways to generate regular income: one’s called the ‘dividend’ option, and the other is the systematic withdrawal plan (SWP).

With the dividend option (IDCW), it’s like getting a slice of the mutual fund’s profits as a payment. On the other hand, SWP lets you choose a specific amount of money you want to take out regularly from the fund you’ve already invested in.

Much confusion surrounds these options as to which one is the best way to generate regular income. In this blog, we dive into the details of these choices and look at important factors you should know before you make up your mind because making the right decision now could make a big difference in the long run.


Let’s look at the flexibility aspect of both options first. When it comes to the ‘dividend’ plan in mutual funds, flexibility isn’t always its strong suit. With this option, how much you receive and how often you get paid is decided by the mutual fund house. Imagine you suddenly need more money each month for whatever reason. With dividend plans, you’re tied to the fund’s discretion.

With SWP, you call the shots. You can set the amount you want to withdraw and how frequently. Let’s say you start with 20K a month, but after a year, life demands 30K – no problem. SWP lets you adjust smoothly and seamlessly. With the growth plan and SWP, you’re free to modify, adapt, and thrive as your circumstances evolve. This flexibility is a game-changer, and it’s something that the dividend plan just can’t match.

Stability of Income

We all love consistency, especially when it comes to income. That’s why many folks gravitate towards the ‘dividend’ plan – the promise of regular payouts, like clockwork. But here’s the twist: while a mutual fund might have a history of playing the dividend game, there’s no guarantee it will keep dealing with those dividend cards in the future. The truth is, even if a fund is known for its dividends, the timing and size of those payouts are under the fund company’s thumb. In simple words, the dividends can be as unpredictable as the weather.

Here too, the systematic withdrawal plan (SWP) has the upper hand. You can direct the fund house to send you a set amount of money right into your bank account, like a monthly paycheck. You can decide the date and the sum and adjust it as per your will, as previously discussed. SWP can limit financial surprises and provide a regular, reliable stream of income.


Taxes are the constant companion of our financial journey. When it comes to mutual funds, taxes play a pivotal role in the dividend versus systematic withdrawal plan (SWP) debate.

If you pick the dividend option, the dividends you receive add up with your taxable income, facing the same tax rate as your regular earnings. If your total income, including dividends, is below the tax radar (basic exemption limit), there is no difference between the dividend option and SWP. But if you belong to the club of higher tax brackets, where rates soar to 20 to 30 percent, taxes can eat up a lot. Whether it’s an equity fund or not, dividends are taxed as per your slab rates. If you’re in the highest bracket, 30 percent of your dividend gets taxed. Let’s say your dividend is 1K– 300 goes towards taxes.

Coming to the growth plan and SWP, the taxes take an interesting twist whether you hold equity or a non-equity fund. Rates are friendlier than the dividend option.

Scenario 1: Equity Funds

  • If you withdraw within a year, you are taxed at 15%
  • If you withdraw after a year, you are taxed at 10% on gains beyond Rs 1 lakh.

From the above, it should be obvious that SWP from equity funds is comparatively better than the dividend option.

Scenario 2: Non-Equity Funds

  • With the recent changes in taxation, capital gains from non-equity funds will be taxed as per your tax slab– meaning it is now on par with the dividend option and no longer classified as short-term and long-term based on the holding period. Earlier long-term gains from non-equity funds enjoyed 20% tax with the indexation benefit. But there is still a catch here if you are planning SWP from non-equity funds compared to the dividend option. As the cost of acquisition is subtracted from your redeemed units in the case of the SWP option, it leads to lower tax outgo. You can read more about it here.

Thank you for taking the time to read.

If you have a question, share it in the comments below or DM us or call us – +91 9051052222. We’ll be happy to answer it.

~Nischay Avichal

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