If you want to generate regular income from your mutual fund investment, you can opt for a Systematic Withdrawal Plan (SWP), a tax-efficient way of creating a regular stream of income.
It is a much better way to partly redeem your investment than in lump-sum amounts if you need a regular cash flow. The money is transferred directly to your bank account as per your choice of redemption option. It is also an efficient way of getting pension during your retirement years, as you are still largely remain invested in the fund and take timely profits as a regular income.
Benefits of SWP
Every individual has their own specific financial goals; hence, fund houses have created specific features catering to individual needs, like SIPs and SWPs, which help achieve your tailored goals on time. Besides, it protects your fund against market volatility, as you approach your retirement goal.
Therefore, it is better to create an SWP to partly redeem your investment before you reach your retirement goal, instead of redeeming the entire amount at once in a lump-sum. Thus, SWPs provide investors regular income from their investment.
Tax Benefits
From the tax point of view, SWP is a very lucrative way of redeeming your funds regularly, as compared to its alternative Income Distribution cum Capital Withdrawal (IDCW) plan for a mutual fund.
If you choose an IDCW to withdraw regular income from a fund, your returns will be taxed as you’ll have to pay a 10 per cent tax deducted at source (TDS) if the payout amount exceeds Rs 5,000.
Equity Mutual Fund
If you redeem your units before a year, the gains are considered short-term capital gains and are taxed at 15 per cent. Gains made from selling equity mutual fund units after 12 months are tax-free up to Rs 1 lakh for a fiscal year. Long-term capital gains of over Rs 1 lakh are taxed at 10 per cent.
Debt And Hybrid Mutual Fund
If you hold your debt and hybrid mutual fund units for less than 36 months, capital gains will be added to your income and taxed as per your income tax slab. However, if the holding period exceeds 36 months, capital gains will be considered as 'long-term' and will be taxed at 20 per cent after indexation.
SWP Redemption Options
Fixed Amount
When you choose a fixed amount for your SWP, you can opt for a fixed withdrawal on a monthly, quarterly, half-yearly and yearly basis. Investors can opt for a plan that suits their financial goals.
Appreciation Withdrawal
You can choose to withdraw all the gains generated from your investments. This option is termed an appreciation withdrawal. Suppose, you’ve invested Rs 100,000 in SIP per month, and your investment generates 1 per cent every month, your appreciation withdrawal will be Rs 4,000 per quarter as your appreciation withdrawal, or whichever redemption period you choose. In this option, you are still invested in the fund and are also able to generate a stream of income through your gains.
