Many investors, especially retirees, look for regular income from their mutual fund investments. Two common options are:

1. SWP (Systematic Withdrawal Plan): You withdraw a fixed amount monthly/quarterly from your investment.
   
2. Dividend Payout Option: The fund house declares dividends from time to time, which are paid to the investor.
   Both sound similar, but they work very differently in practice. Let’s explore through a case study.
   

Scenario

• Investment: ₹10,00,000 in a Balanced Advantage Fund (as on Jan 2018)
  
• Investor wants: ₹10,000 per month regular income (₹1,20,000 annually) 

Option 1: Dividend Payout

• Nature: Dividend is declared by the AMC, not guaranteed. In bad markets, dividends may be skipped or reduced.
  
• Taxation (Post-April 2020 in India):
  
  • Dividends are added to your total income and taxed as per individual income tax slab.
    
  • TDS of 10% (if dividend exceeds ₹5,000 annually).
    
• Issue: Income is uncertain and depends on AMC’s decision. 

Option 2: SWP (Systematic Withdrawal Plan)

• Nature: Investor withdraws a fixed sum (say ₹10,000/month) directly from the invested corpus.
  
• Taxation:
  
  • Treated as redemption of units.
    
  • Only the capital gain portion of each withdrawal is taxed.
    
  • If units held >1 year: Long Term Capital Gains (LTCG) taxed at 12.5% beyond ₹1.25 lakh per year.
    
  • If units held ≤1 year: Short Term Capital Gains (STCG) taxed at 20%.
    
• Benefit: Predictable and customizable income, irrespective of AMC dividend policy.

Key Takeaways

1. SWP is more tax-efficient than Dividend Payout, especially for investors in higher tax brackets.
   
2. Dividend payout is uncertain since AMC may skip payments in volatile markets.\
   
3. SWP allows control over income flow, while dividends don’t.
   
4. For long-term wealth + regular income, SWP is usually the better choice. 

✅ Conclusion

For investors seeking regular and tax-efficient income, especially retirees, Systematic Withdrawal Plan (SWP) is a superior option compared to Dividend Payout. Dividends may sound attractive, but their uncertainty and higher tax burden make them less suitable for dependable cash flow.