Lesson 9 of 10 · SIP, STP and SWP — How They Work

SIP, STP and SWP Compared

SIP, STP and SWP are three ways of transacting at fixed intervals: into a scheme, between schemes, and out of a scheme. This lesson compares them, shows which transactions are redemptions for tax, and works through how an SWP uses up units.

Fact-checked 8 October 20264 practice questions in the game

Three directions of flow

A Systematic Investment Plan (SIP) invests a fixed amount from the investor's bank account into a scheme. A Systematic Transfer Plan (STP) moves a fixed amount from one scheme to another scheme of the same fund house. A Systematic Withdrawal Plan (SWP) redeems a fixed amount from a scheme and pays it to the investor.

The three differ in direction: bank account to scheme, scheme to scheme, and scheme to bank account. A step-up SIP is not a fourth type; it is a SIP whose instalment rises at intervals.

Which transactions are redemptions

A SIP instalment is a purchase. Stamp duty of 0.005% is deducted and units are allotted; no capital gain arises at that point.

Each STP transfer is a redemption from the source scheme, with the proceeds used to buy units of the target scheme. Any gain on the units redeemed is taxed according to the source scheme's type and those units' holding period. The purchase in the target scheme is not itself a taxable event, so twelve monthly transfers mean twelve taxable events, not twenty-four. An exit load may also apply to the units redeemed.

Each SWP withdrawal is likewise a redemption. Only the gain part of the amount withdrawn is taxed, at the rate for that fund type and holding period; the rest is the investor's own cost coming back. Units are taken as sold first-in-first-out.

How an SWP uses up units

Under an SWP the rupee amount is fixed, so the number of units redeemed each time is amount ÷ NAV. A fixed withdrawal redeems more units when the NAV is lower and fewer when it is higher, the mirror image of a SIP.

The number of units falls with every withdrawal. How long the money lasts depends on the amount withdrawn and on the scheme's returns, which are not assured. If withdrawals exceed growth, the capital runs down, and no rate of withdrawal is assured to last.

Rules at a glance

SIPFixed amount from the bank account into a scheme; each instalment is a purchaseStamp duty of 0.005% on each instalment

STPFixed amount from one scheme to another scheme of the same fund house; each transfer is a redemption from the source schemeStamp duty of 0.005% on the purchase in the target scheme

SWPFixed amount redeemed from a scheme and paid to the investor; each withdrawal is a redemptionNo stamp duty on redemption

Payment of redemption proceedsWithin 3 working days (5 for schemes with 80% or more invested overseas)SEBI Master Circular for Mutual Funds, 20 March 2026

Illustration

Shalini's twelve transfers (illustrative)

Shalini holds units worth ₹12,00,000 in one scheme and registers an STP of ₹1,00,000 a month for twelve months into another scheme of the same fund house. Each month, units of the first scheme worth ₹1,00,000 are redeemed, and any gain on them is a capital gain in her hands. The ₹1,00,000 then buys units of the second scheme after stamp duty of 0.005%, which is ₹5. Over the year there are twelve redemptions, twelve purchases and twelve taxable events.

Worked example

Units used up by an SWP of ₹20,000 a month (illustrative; exit load and tax ignored)

The investor holds 10,000 units. The NAV figures below are invented to keep the arithmetic simple.
Month 1, NAV ₹50: units redeemed = 20,000 ÷ 50 = 400. Units left = 10,000 − 400 = 9,600.
Month 2, NAV ₹40: units redeemed = 20,000 ÷ 40 = 500. Units left = 9,600 − 500 = 9,100.
Month 3, NAV ₹50: units redeemed = 20,000 ÷ 50 = 400. Units left = 9,100 − 400 = 8,700.
Had the NAV been ₹50 throughout, 1,200 units would have been redeemed. The actual figure is 1,300: the month at ₹40 used up 100 more units.
Gain part of the first withdrawal: if the 400 units redeemed had cost ₹30 each, their cost is 400 × 30 = ₹12,000 and the gain is 20,000 − 12,000 = ₹8,000. Only the ₹8,000 is a capital gain.

Result. After three withdrawals totalling ₹60,000 the investor holds 8,700 units. A lower NAV used up units faster, and only the gain part of each withdrawal is taxable.

Key points

SIP: bank account to scheme. STP: scheme to scheme within the same fund house. SWP: scheme to bank account. Each uses a fixed amount at fixed intervals.
Each STP transfer and each SWP withdrawal is a redemption from the source scheme and can give rise to a capital gain; exit load may also apply.
The purchase leg of an STP is not a taxable event, so twelve monthly transfers are twelve taxable events.
A fixed SWP amount redeems more units when the NAV is lower, and the capital can run down if withdrawals exceed growth.

Common misunderstandings

An STP is not a single tax-free movement: each transfer is a redemption from the source scheme and can give rise to a capital gain.
The whole SWP amount is not taxed as income: only the gain part of each withdrawal is taxed, at the rate for that fund type and holding period.
An SWP does not leave the capital untouched: every withdrawal redeems units, and the capital can run down if withdrawals exceed growth.

Questions people ask

What is the difference between an STP and an SWP?

An STP moves a fixed amount into another scheme of the same fund house. An SWP pays a fixed amount out to the investor. Both redeem units of the source scheme.

Why does an SWP redeem a different number of units each month?

Because the rupee amount is fixed and the NAV is not. Units redeemed = amount ÷ NAV, so a lower NAV means more units.

Is there a rate of withdrawal that is sure to last?

No. How long the money lasts depends on the amount withdrawn and on returns, which are not assured.

What this lesson relies on

SEBI Master Circular for Mutual Funds, 20 March 2026 (redemption and payment of proceeds)
SEBI (Mutual Funds) Regulations, 2026, regulation 44(4) (exit load)
Income-tax Act, 2025 (capital gains on redemption of units)
Indian Stamp Act, 1899, as amended by the Finance Act, 2019 (stamp duty on mutual fund units from 1 July 2020)

This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.