Systematic withdrawal from investments is becoming quite common. Now an SWP (systematic withdrawal plan) can be executed in equity, debt, and hybrid mutual fund schemes. Touted as an effective mode of taking out money for retirees and pensioners, SWP can be used to make relatively tax-efficient transactions, based on your requirements. Here is a complete low-down on SWP in terms of its workings, taxation and structure.
How SWP is executed
Taking the SWP route in a mutual fund allows you to withdraw fixed or variable amounts at regular intervals — monthly, quarterly, or yearly. Let’s take Manav’s example. He needs to make a lump-sum investment in a mutual fund scheme and then fix a date for periodic withdrawals. Let’s assume that Manav has invested a lump-sum amount ₹5 lakh in an equity mutual fund on January 5, 2022, the NAV of which was ₹100 on the day. This means that investment has been made in 5,000 units of that mutual fund scheme. Manav chooses to withdraw ₹10,000 every month starting from February 1, 2022, when NAV was ₹102. The investment value on the day was ₹5.1 lakh, which decreased to ₹5 lakh, post withdrawal along with reduction in units (4,902), as 98 units were redeemed. Hence, the same process goes on every month till the end of the SWP.
Taxation of withdrawals
In an equity-oriented mutual fund, if any redemption takes place before one year of investment, short-term capital gains tax of 15 per cent will be charged on realised gains. If held for more than one year, long-term capital gains tax of 10 per cent is applicable beyond ₹1 lakh profit. Capital gains on redemptions of mutual fund schemes other than equity-oriented ones will be taxed as per your income-tax slab rate, if the redemptions are made before 36 months of investment. If the holding period is more than 36 months, long-term capital gains tax of 20 per cent with indexation benefit is available. You can optimise your tax outflow if you plan withdrawals smartly.
Generally, there are two options under SWP. One, you can opt for withdrawing a fixed amount at periodic intervals as per your preference. Two, you can choose to receive only the capital appreciation part during specified intervals and thereby no amount shall be withdrawn from the principal. Further, one can receive variable periodic withdrawals based on market valuation multiples, sentiment parameters and volatility measures through Kotak’s Smart SWP. However, do note that variable withdrawals actually go against the goal of rupee-cost averaging which systematic plans aim to achieve.
How to structure your SWP
SWP is generally used by people upon retirement while it can even be used for certain specific goals. One needs to structure their SWP keeping in mind the tax implications and goals. If you want to have an SWP in equity or equity-oriented hybrid fund for post-retirement purpose, you can invest a small portion of your lumpsum a year before retirement. With debt funds, you can invest about three years before retirement, to make regular withdrawals that are tax efficient. The twin purposes of beating inflation and taxation are important to maintain your kitty through your lifetime. Typically, the withdrawal rate should not be more than 4 per cent annually, if you retire at 60.