SWP or IDCW: Which is the better option to generate regular income for retirees?

If you are a retiree or nearing retirement, this question might have crossed your mind at least once - can I generate consistent cash flow from my mutual fund investments' growth plan?

The answer to your question is a resounding 'yes'. By setting up SWPs (systematic withdrawal plans), you can generate a regular monthly cash flow from your mutual funds. What's more, SWPs come with several benefits, making them a better option than IDCW (income distribution cum capital withdrawal) or dividend plans.

But first, what are SWPs?

An SWP allows you to withdraw a specific sum from a fund at regular intervals. It is ideal for those seeking a fixed income stream, such as retirees.

To set up an SWP from your mutual fund, you only need to instruct the fund house to redeem a part of it and get the money credited to your bank account monthly. Once instructed, it works on autopilot.

Two reasons why you should pick SWPs over IDCW plans

Here is why retirees should consider setting up an SWP to generate income from their mutual fund investments.

#1 Consistency and flexibility

SWPs offer two key advantages: consistency and flexibility. They provide regular cash flows by allowing you to withdraw a fixed amount at pre-defined intervals, which is credited directly to your bank account on a specific date each month.

Additionally, SWPs give you complete control over the amount and frequency of withdrawals. For instance, you can start with a monthly withdrawal of Rs 50,000 and later increase it to Rs 70,000 by simply modifying the SWP instructions.

In contrast, IDCW plans lack both consistency and flexibility, as payouts depend entirely on the fund house's discretion, making cash flows unpredictable.

#2 Tax-efficiency

Under SWPs, only the capital gains (selling price minus cost) earned on your mutual fund withdrawals are taxed.

But when it comes to dividends from IDCW plans, they are taxed at your applicable income tax slab rate. This can lower your post-tax returns, especially if you are in the higher tax brackets.

Let's take an example to understand this better. Suppose you receive a dividend of Rs 50,000. This entire amount will get taxed at your applicable income tax slab rate. However, if you had invested in a fund's growth option and redeemed, let's say, units worth Rs 50,000, only the gains or the capital appreciation earned on the same will get taxed.

Another drawback of IDCW plans is that the dividend paid is an income out of your own capital, along with any returns. Hence, the NAV (net asset value) of the mutual fund units you hold reduces.

The bottom line

SWPs give investors more control over the amount and timing of withdrawals, offering regular, guaranteed cash flows.

Moreover, SWPs are more tax-efficient in most cases, as the gains are taxed at a lower rate than dividend income, in turn, reducing your tax liability.

Thus, opting for a growth plan and setting up an SWP could be the better choice over IDCW or dividend plans for those looking for regular and predictable cash flows with greater flexibility and tax benefits during their silver years.

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Also read: Dividend plan vs SWP: Which one to choose for regular income?

This article was originally published on January 31, 2025.