If you have a large amount saved, say from a bonus, a property sale or years of investing, and you want it to pay you every month, two options come up again and again: a fixed deposit that pays monthly interest, and a systematic withdrawal plan (SWP) from mutual funds.
Both put money in your bank account every month. They work very differently, though, and the differences add up over 10 or 20 years. Let’s compare them with real numbers.
How each one works
With an FD, you get a fixed interest rate for a fixed period. Choose a monthly payout, and the bank sends you the interest every month. Your deposit stays the same.
With an SWP, your money is invested in one or more mutual funds. You choose an amount and a date, and each month the fund sells just enough units to pay you. Whatever you don’t withdraw stays invested, so it can grow, or fall, with markets.
The example: ₹1 crore, a 20-year view
Let’s take ₹1 crore and someone in the 30% tax slab.
- FD: 7% a year, interest paid monthly. That’s ₹58,333 a month before tax.
- SWP: we’ll start lower, at ₹35,000 a month (4.2% a year), and raise it by 5% every year to keep up with rising prices. We’ll assume the invested money grows at 8% a year, a reasonable assumption for a balanced mix. Real returns will go up and down.
Why start the SWP lower? Because an SWP that takes out less than the money earns leaves room for both the income and the savings to grow. We’ll come back to this.
Round 1: income after tax
FD interest is added to your income and taxed at your slab rate every year. At 30%, ₹58,333 becomes about ₹40,833 a month in hand, before cess.
An SWP is taxed differently. Each withdrawal is partly your own money coming back, and partly gains. Only the gains part can be taxed. In the early years, most of each withdrawal is your own money.
Here’s roughly what that looks like if the withdrawals come from an equity-oriented fund, under the rules at the time of writing:
That’s the single biggest difference for people in higher tax slabs. With an FD, roughly a third of your income can go to tax. With an SWP, tax is usually small in the early years, because you’re mostly getting your own money back.
Two things to keep in mind:
- Tax rises over time. As your savings grow, a larger share of each withdrawal is gains, so the tax slowly goes up.
- Debt funds are taxed differently. Gains on debt fund units bought after 1 April 2023 are taxed at your slab rate. Even then, only the gains part is taxed, not the whole withdrawal.
We explain this in detail in how SWP withdrawals are taxed.
Round 2: inflation
This is where the gap really opens up.
FD interest stays the same every month. Prices don’t. At 6% inflation, ₹58,333 in 20 years will buy only what about ₹18,190 buys today.
An SWP can be raised every year. In our example, the income goes from ₹35,000 a month to about ₹88,000 a month by year 20.
Round 3: what’s left at the end
With an FD, your ₹1 crore comes back at the end. In 25 years, though, it will buy far less than it does today.
With the SWP in our example, the savings don’t just survive; they grow, because the withdrawals start below what the money earns. After 25 years of rising withdrawals, totalling about ₹2 crore, around ₹1.8 crore could be left.
Round 4: risk
This is where the FD wins, and it matters.
- FD income is guaranteed. Bank deposits are also insured by the DICGC up to ₹5 lakh per depositor per bank.
- SWP income is not guaranteed. If markets fall sharply, especially in the first few years, and you keep withdrawing, your savings shrink faster and may not recover in time. This is called sequence risk, and we explain it in is the 4% rule safe in India?
Three things reduce the risk of an SWP:
- A modest withdrawal rate. Start around 3 to 3.5% of your savings a year rather than 6 or 7%.
- A steadier portion. Keep the next couple of years of income in debt funds, so you don’t have to sell equity right after a fall.
- Flexibility. Take a little less for a while after a bad year.
Side by side
| Feature | FD with monthly payout | SWP from mutual funds |
|---|---|---|
| Income | Fixed and guaranteed | Fixed amount you choose, not guaranteed |
| Tax | Full interest taxed at your slab, every year | Only the gains part, when you withdraw |
| Inflation | Income stays flat | Income can be raised each year |
| Your savings | Stay the same in rupees | Can grow or shrink with markets |
| Flexibility | Breaking early usually costs a penalty | Change, pause or stop any time (exit loads may apply) |
| Best for | Money you need in the next 1 to 3 years | Income over 10, 20 or 30 years |
So which should you choose?
For most people, it isn’t either-or.
- Use FDs (or liquid funds) for money you’ll spend in the next year or two, plus an emergency fund.
- Use an SWP for income further out, where time can smooth out the ups and downs and the tax advantage adds up.
If you’re in a low tax slab, need the money within a few years, or can’t sleep with any ups and downs, an FD may suit you better. If you’re in a higher slab and need income for 15 years or more, an SWP is usually worth a serious look.
You can test your own numbers with our SWP calculator and FD calculator. If you’re still building your savings, Bridgit Second Income shows how to build for about 10 years and then draw a monthly income through an SWP.
