I am living on a Mutual Fund SWP after retirement. How will my ₹5 lakh LTCG be taxed?

One of our readers, Tarun G Acharya, recently shared that he has retired with income from mutual funds as his only source of income. He withdraws his annual expenses from his mutual fund portfolio through a Systematic Withdrawal Plan (SWP). But he wants to know how the withdrawal this year will be taxed if a large chunk of it is capital gains.

For any query on tax calculation, it is important to mention the financial year or the assessment year. Acharya has not mentioned the financial year, instead, he said, "this year".

We are assuming that by "this year", he means the current financial year, i.e., FY 2025-26 or AY 2026-27, as his mail came towards the end of April.

According to CA Dr Suresh Surana, the tax for a person having long-term capital gains up to ₹5 lakh in FY 2025-26 will be Nil if he has no other source of income.

Answering Acharya's query, Dr Surana gave the following explanation:

A taxpayer who has no income other than withdrawals from a Systematic Withdrawal Plan (SWP) of mutual funds and has realised long-term capital gains (LTCG) of ₹5 lakh during the financial year may be liable to pay tax only on the portion of LTCG that remains after adjusting both the exemption limit under Section 112A and the unutilised basic exemption limit.

As per current tax provisions, the first ₹1.25 lakh of LTCG on equity-oriented mutual funds is exempt. Additionally, if there is no other income, the basic exemption limit (e.g., ₹4 lakh under the new tax regime) may be set off against the remaining LTCG, further reducing the taxable amount.

Thus, in such a scenario, tax would apply only on the balance LTCG after both exemptions are accounted for, resulting in nil tax liability.

What is SWP?

SWP is a facility in mutual funds that allows investors to withdraw a fixed amount at regular intervals while the balance remains invested. With this facility, investors can avoid redeeming the entire investment.

Disclaimer: The views and opinions expressed above are those of respective experts/commentators and do not reflect the views of Upstox. The above Q&A is only for informational purposes and should not be considered investment advice from Upstox.