Retirement Planning: SWP vs dividend plan, which one is better for regular income for retirees and why? Know from experts

Retirement planning is to prepare yourself today for the future so that you can achieve your goals. For financial planning, you need to set your goals and have an idea of the funds you need for retirement.

There are many options to grow your money after retirement or for retirement. These include fixed deposits (FDs), SWP (systematic withdrawal plan), dividend plans, and others.

In this article, we will discuss SWP and dividend plans to know which one is better for regular income after retirement. But before that, let's know what are SWP and dividend plans.

What is SWP?

It is a mutual fund investment plan. In this, investors can withdraw money regularly from their investments. This is a flexible scheme. Investors can choose the frequency, amount and duration of withdrawals.

What are the benefits of SWP?

Frequency: You can choose the frequency of their withdrawals as per their needs.
Amount: Investors can also choose the amount they want to withdraw.
Withdraw gains only: You can leave the invested capital and withdraw only the increased amount.
SIP: SWPs complement Systematic Investment Plans (SIPs), which focus on developing wealth via regular payments.

What is a dividend plan?

A dividend plan is a financial strategy in which mutual fund participants receive periodical dividends based on the fund's income and capital appreciation. It is sometimes referred to as the Income Distribution cum Capital Withdrawal (IDCW) plan.

Now, let's take a look at expert's views on which one is better for regular income.

Alok Rungta MD & CEO at Future Generali India Life Insurance, says, For retirees seeking regular income, Systematic Withdrawal Plans (SWPs) often provide greater predictability and flexibility compared to dividend plans. SWPs allow retirees to decide the withdrawal amount and frequency, ensuring a steady cash flow, which is essential for managing monthly expenses. Unlike dividend plans, which rely on fund managers declaring profits and can result in inconsistent payouts, SWPs offer more control. Additionally, SWPs are more tax-efficient, as only the gains portion of the withdrawn amount is taxed, unlike dividends taxed at the investor’s income slab. For example, a retiree investing Rs 50 lakh in an SWP can withdraw Rs 25,000 monthly while the remaining corpus grows, making it an effective solution for stability and long-term financial planning."

"For retirees, while the regular income is the most important factor, there are three other important parameters to consider; i.e. safety of principal, income tax, and inflation. From a safety perspective fixed income investment works better as compared to market-linked investment. However, inflation can erode the purchasing power of a corpus very quickly if the corpus has no market-linked component," said Gautam Shah, a certified financial planner."

"As a good practice, a retiree can invest in fixed income for safety and should also consider market-linked products to beat inflation to help maintain the purchasing power of corpus as well as lower taxation on capital gain tax on SWP (as compared to dividend income). Considering the income tax slab, one can have 7.5 lakh of annual (60k per month) income tax-free per PAN card. However if someone needs regular income more, then a combination of dividend and SWP income can ensure a steady income, optimise tax liability, and also beat inflation (to ensure corpus lasts longer)," Shah added.

According to Bhavesh Garg, director of VSN Financial Services, "With an SWP, retirees can withdraw a fixed amount periodically from their mutual fund corpus. The advantage lies in its tax efficiency: only the capital gains portion is taxed, and equity-based funds enjoy long-term tax benefits, with gains up to Rs 1 lakh exempt annually. In contrast, dividend plans are taxed at the investor’s slab rate, leading to higher tax outflows. Additionally, dividends are at the discretion of fund managers, lacking predictability."

For example, a retiree invested Rs 50 lakh in equity funds. With an SWP of Rs 30,000 monthly, he withdrew Rs 3.6 lakh annually, enjoying minimal tax liability while his corpus continued to grow. His friend, relying on dividends, faced higher taxes due to slab-rate deductions and inconsistent payouts.

Viplav Majumdar, founder of PlanYourWorld.com, said, "For income after retirement, when it comes to SWP vs dividend, income from dividend is added in your total income and taxed at the rate of applicable income tax rate. If the income from dividend is Rs 3 lakh and your taxable income is 10 lakh so your total taxable income will be 13 lakh and you will end up paying tax rate of 15 per cent on Rs two lakh (from 10 to 12 lakh) and 20 per cent on one lakh (12 to 13 lakh).  Your total tax on dividend income will be Rs 50,000 plus cess."

"On the other side, if your income is from SWP, assuming that you have taken SWP after one year of investing, so you have long-term capital gain. In this case your total income tax rate will not change if you have taken the fund like equity savings or Balanced advantage fund. And you end up paying just 12.5 per cent tax on the gain amount," he added.

Also Read: Financial Planning: 7 investment plans that can give you regular income; check details inside