Can SWPs from mutual funds support home loan payments? Key insights from industry expert on cap­ital gains tax relief

Many homebuyers exploring tax-efficient financing options often ask whether Systematic Withdrawal Plans (SWPs) from long-term mutual funds or stocks can be used for monthly home loan payments. Cleartax founder and chief exec­ut­ive Archit Gupta provided cautions against this strategy.

According to the industry expert, many borrowers continue their SIPs and use monthly SWP with­draw­als to repay loans instead of liquid­ating their entire invest­ment port­fo­lio upfront. While this may appear convenient, it poses structural risks under Section 54F of the Income-tax Act and complicates compliance.

Tax law treats each SWP payout as a separate sale transaction, creating multiple tax events. This fragmentation can conflict with Section 54F timelines and the Capital Gains Account Scheme framework, potentially triggering disallowances during scrutiny.

It is important to note that tax laws consider each monthly SWP pay­out, with its own ‘date of sale’, as an inde­pend­ent trans­ac­tion. Complicating the matter, this can split a single invest­ment into mul­tiple tax events. Gupta warned against this frag­ment­a­tion, which could con­flict with Sec­tion 54F’s timelines and the oper­a­tional frame­work of Cap­ital Gains Account Scheme (CGAS). As a consequence, auto­mated sys­tem flags might be triggered, resulting in disallowances during scrutiny by an assess­ing officer (AO).

“Sec­tion 54F bene­fits can be claimed even when a res­id­en­tial prop­erty is bought with a home loan. However, the pro­vi­sion is designed around rein­vest­ing sale pro­ceeds in the house, not through a long-term SWP strategy,” the Cleartax CEO said.

In essence, tax­pay­ers should avoid relying on peri­odic with­draw­als from mutual funds or stocks. Instead, cap­ital gains pro­ceeds should be used towards the prop­erty in a con­sol­id­ated man­ner within the pre­scribed timelines.

Struc­tured lump-sum redemp­tion of long-term cap­ital gains over SWP?

Gupta strongly recommends a struc­tured lump-sum redemp­tion of long-term cap­ital gains over SWPs, as this provides a clear audit trail, reduces compliance risks and minimizes litigation.

Sec­tion 54F of the Income Tax Act is avail­able under both the old and new tax regimes and permits capital gains exemp­tion on property bought with a home loan, provided the core invest­ment cri­teria are met. Capital gains tax exemp­tion can be full or pro­por­tion­ate, depend­ing on the sum inves­ted provided the house is bought within one year before or two years after sale, or con­struc­ted within three years.