Systematic Withdrawal Plan - A smart technique for regular income

Smartly use SWP for regular income

SWPs allow you to withdraw a fixed amount of money at periodic intervals from a fund (a fixed date every month, once every two months, or even quarterly). SWP is basically, opposite of SIP, where you invest a certain amount to purchase fund units. Just like in an SIP, the amount to withdrawn through an SWP can be monthly, quarterly, semi-annually and annually. This facility generates an additional cash flow without the requirement of liquidating the entire investment.

Who can do SWPs?

SWPs are useful for those looking to get regular income, particularly senior citizens. In fact, anyone who wants a regular stream of income - be it those on a sabbatical, those looking to start their own business, or even those simply wanting to increase their cash flows - can benefit from this option.

How are they taxed?

SWP redemption is as per first in first out (FIFO) method wherein units first bought are assumed to be redeemed first. Hence your costs for the purpose of taxation will be considered as per FIFO method.

If you redeem/withdraw your investments in equity mutual funds after 12 months, your investments would qualify for long-term capital gains tax. Long-term capital gains in excess of Rs 1 lakh are taxed at 10% currently. If you sell your equity mutual fund investments before 12 months, you will have to pay a short-term capital gains tax at a rate of 15%.

Debt mutual funds qualify for long-term capital gains tax only if investments are held for three years or more. The long-term capital gains tax on debt funds is 20% with the inflation indexation benefit on your original investments. If debt mutual fund investments are sold before three years, the short-term gains are taxed as per your applicable income tax slab.

Your SWPs will also be taxed as per the above rules. Based on your requirement and tax slab you can plan your SWP accordingly.

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Source: Internal, Value Research

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