Systematic Withdrawal Plan (SWP): Stream Regular Income From Your Investments
A lot is being spoken about how to ensure a monthly income post retirement. Have you heard about Systematic Withdrawal Plan in this regards? Not just retirement, at any phase of your life, if you wish to automate regular withdrawals from your mutual fund investments, then Systematic Withdrawal Plan can be your preferable solution because it is tax efficient, offers some independence from market instability and also helps in avoiding market timing.
What is Systematic Withdrawal Plan (SWP)?
Systematic Withdrawal Plan is linked to mutual fund investments. It is just the opposite of the much popular concept SIP, also known as Systematic Investment Plan. In SIP, instead of lump sum investment, investors invest small & fixed amounts on a regular basis, similarly in SWP, instead of lump sum withdrawal, fixed amounts can be withdrawn at regular intervals.
How Systematic Withdrawal Plan (SWP) Works?
Suppose you have 10,000 units of a mutual fund schemes, where NAV per unit is Rs 20. This means the total cost of your units is Rs. 2 Lakh. On lump sum withdrawal, you will get Rs. 2 Lakhs only but if you opt the SWP way then there are chances of getting more benefits. How?
Through SWP, you will withdraw a fixed amount (say Rs. 5000) on a regular basis (say on a monthly basis). This month if the NAV is Rs. 20, then for withdrawing Rs. 5000, your 250 units will get used (Rs 5000 / Rs 20 NAV= 250 units). Your balance units are 9,750 worth Rs. 1,95,000 @ Rs. 20 NAV.
Now, suppose next month the NAV per unit turns out to be Rs. 20.15, then for withdrawing Rs. 5000, you have to utilize 248.14 units (Rs 5000/Rs 20.15 NAV= 248.14 units). Thus, your balance units are 9,502.86 worth Rs. 1,91,462 @ Rs. 20.15 NAV.
If you observe here, you have withdrawn Rs 10000 from your total investment of Rs. 2 Lakhs, so the balance amount should be Rs. 1,90,000. But because you took the SWP route, your balance amount is Rs. 1,91, 462. Thus, you gained Rs. 1,462 in 2 months.
Top Features of Systematic Withdrawal Plan
- Fixed amount gets credited to the investors' account monthly/quarterly/half yearly
- Remaining amount can be withdrawn anytime
- Tax efficient returns in comparison of FDs/Bonds
- Withdrawal amount can be increased by investing more in the same SWP scheme
- SWP can be stopped or shifted to another scheme
- SWP can be started from immediate next month of investment.
Why SWP is a Tax-Efficient Way in Comparison to Traditional Debt Products like Bonds/FDs?
Traditionally, debt funds with dividend option were the preferable products to stream a regular income from investments, but these are not tax-efficient because all the dividends attract dividend distribution tax (DDT) at the rate of approximately 28%. Dividend distribution tax (DDT) is applicable on all non-equity funds and it includes income funds, monthly income plans, gilt funds, ultra short-term funds, etc.
In comparison to this tax liability, Mutual Funds' Monthly income plan with SWP is a better and tax efficient solution because the actual tax liability of these withdrawals are much lower if the units are held for more than a year. Because in such a situation, the withdrawals are treated as long-term capital gain and thus taxed at preferential rates (10.3% without indexation, or 20.6% with indexation).
A simple example will give you a better understanding.
Let's assume two investors - A and B. Investor A invests Rs. 15,00,000 in mutual funds' monthly Income Plan with SWP and Investor B invests Rs. 15,00,000 in Bonds/FDs. Both the investors are in 30% income tax bracket.
Mr. A is withdrawing through SWP from his Mutual Funds at 8% p.a rate and Mr. B is getting 8% returns per annum on his Bond/FD investments done for 10 years. For both, their monthly income works out to Rs. 10,000 p.m. Here is the illustration of their tax liability.
MIP SWP Plan
In this case, Mr. A would pay only Rs. 37, 535 as tax under capital gains while Mr. B will have to pay Rs, 3,60,000as tax on interest income.
Mutual funds are subject to market risks. The example is for illustration only and the calculations don't include any surcharge or income tax exemptions and assume that funds are not taken out even after 10 years.
SWP option is useful for retirees, businessmen/professionals, housewives, students studying abroad and rest all who wish to stream a monthly income from their investments in a tax efficient way. SWP option is available in most of the mutual Fund schemes, but investors should choose one that suits their risk appetite.
For regular update like this page https://www.facebook.com/WealthMaximization/A lot is being spoken about how to ensure a monthly income post retirement. Have you heard about Systematic Withdrawal Plan in this regards? Not just retirement, at any phase of your life, if you wish to automate regular withdrawals from your mutual fund investments, then Systematic Withdrawal Plan can be your preferable solution because it is tax efficient, offers some independence from market instability and also helps in avoiding market timing.
What is Systematic Withdrawal Plan (SWP)?
Systematic Withdrawal Plan is linked to mutual fund investments. It is just the opposite of the much popular concept SIP, also known as Systematic Investment Plan. In SIP, instead of lump sum investment, investors invest small & fixed amounts on a regular basis, similarly in SWP, instead of lump sum withdrawal, fixed amounts can be withdrawn at regular intervals.
How Systematic Withdrawal Plan (SWP) Works?
Suppose you have 10,000 units of a mutual fund schemes, where NAV per unit is Rs 20. This means the total cost of your units is Rs. 2 Lakh. On lump sum withdrawal, you will get Rs. 2 Lakhs only but if you opt the SWP way then there are chances of getting more benefits. How?
Through SWP, you will withdraw a fixed amount (say Rs. 5000) on a regular basis (say on a monthly basis). This month if the NAV is Rs. 20, then for withdrawing Rs. 5000, your 250 units will get used (Rs 5000 / Rs 20 NAV= 250 units). Your balance units are 9,750 worth Rs. 1,95,000 @ Rs. 20 NAV.
Now, suppose next month the NAV per unit turns out to be Rs. 20.15, then for withdrawing Rs. 5000, you have to utilize 248.14 units (Rs 5000/Rs 20.15 NAV= 248.14 units). Thus, your balance units are 9,502.86 worth Rs. 1,91,462 @ Rs. 20.15 NAV.
If you observe here, you have withdrawn Rs 10000 from your total investment of Rs. 2 Lakhs, so the balance amount should be Rs. 1,90,000. But because you took the SWP route, your balance amount is Rs. 1,91, 462. Thus, you gained Rs. 1,462 in 2 months.
Top Features of Systematic Withdrawal Plan
- Fixed amount gets credited to the investors' account monthly/quarterly/half yearly
- Remaining amount can be withdrawn anytime
- Tax efficient returns in comparison of FDs/Bonds
- Withdrawal amount can be increased by investing more in the same SWP scheme
- SWP can be stopped or shifted to another scheme
- SWP can be started from immediate next month of investment.
Why SWP is a Tax-Efficient Way in Comparison to Traditional Debt Products like Bonds/FDs?
Traditionally, debt funds with dividend option were the preferable products to stream a regular income from investments, but these are not tax-efficient because all the dividends attract dividend distribution tax (DDT) at the rate of approximately 28%. Dividend distribution tax (DDT) is applicable on all non-equity funds and it includes income funds, monthly income plans, gilt funds, ultra short-term funds, etc.
In comparison to this tax liability, Mutual Funds' Monthly income plan with SWP is a better and tax efficient solution because the actual tax liability of these withdrawals are much lower if the units are held for more than a year. Because in such a situation, the withdrawals are treated as long-term capital gain and thus taxed at preferential rates (10.3% without indexation, or 20.6% with indexation).
A simple example will give you a better understanding.
Let's assume two investors - A and B. Investor A invests Rs. 15,00,000 in mutual funds' monthly Income Plan with SWP and Investor B invests Rs. 15,00,000 in Bonds/FDs. Both the investors are in 30% income tax bracket.
Mr. A is withdrawing through SWP from his Mutual Funds at 8% p.a rate and Mr. B is getting 8% returns per annum on his Bond/FD investments done for 10 years. For both, their monthly income works out to Rs. 10,000 p.m. Here is the illustration of their tax liability.
MIP SWP Plan
In this case, Mr. A would pay only Rs. 37, 535 as tax under capital gains while Mr. B will have to pay Rs, 3,60,000as tax on interest income.
Mutual funds are subject to market risks. The example is for illustration only and the calculations don't include any surcharge or income tax exemptions and assume that funds are not taken out even after 10 years.
SWP option is useful for retirees, businessmen/professionals, housewives, students studying abroad and rest all who wish to stream a monthly income from their investments in a tax efficient way. SWP option is available in most of the mutual Fund schemes, but investors should choose one that suits their risk appetite.
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