Systematic withdrawal plan (SWP) is a method of redeeming your investments in mutual funds (MFs). You give a standing instruction to the MF, that a given amount is to be redeemed from the fund(s) you have invested in. The date is mentioned in the standing instruction. The frequency is usually monthly, but it can be of any frequency as per your convenience. As an example, you have investments in 10 funds across Asset Management Companies (AMCs). Of these, you want to avail of 5 funds as of now for SWP and keep the other 5 intact. Depending on your investment amount and requirements, you can instruct for redemption of say ₹20,000 per month from fund A, ₹25,000 per month from fund B, ₹15,000 per month from fund C, and so on. You may define the date as say 5th day or 10th day of the month.

SWP can be used by any investor, but is popular in retirement planning. Senior citizens, who do not have active income, utilise this method for regular cash flow requirements.

There is flexibility in this approach. The quantum of SWP can be increased or decreased as per requirement. An SWP can be stopped as well, if not required. If required, it is possible to do lump-sum withdrawal from a fund or even completely exit a fund, if it is under-performing for a long period of time. To be noted, so much of flexibility is not there in some of the other investment avenues used for cash flows during retirement phase.

Taxation

In the growth option of equity funds, taxation is as per holding period. For a holding period of up to one year, it is short-term capital gains (STCG). STCG is taxable at 15% plus surcharge and cess as applicable to the investor.

For a holding period of more than one year, it is taxable as long-term capital gains (LTCG). LTCG is taxable at 10% plus surcharge and cess as applicable to the investor. However, LTCG is applicable for capital gains of more than ₹1 lakh per financial year; up to ₹1 lakh of LTCG is exempt from tax.

For one-time investment — one time redemption, capital gain for taxation is computed as exit net asset value (NAV) of the fund minus entry NAV. For a series of entries and/or exits, capital gain is computed on the basis of first in first out (FIFO). If you did a lump sum investment in the fund earlier, then the multiple exit NAVs of your SWP will be compared with the entry NAV for computing capital gains. If you had done a systematic investment plan (SIP) earlier and doing a SWP now, every redemption NAV will be matched with the earliest investment (first in) for capital gains.

Your SWP should commence one year after the initial investment in the fund, to avail of LTCG.

Depending on your requirements, you can try to modulate your SWP amount in such a manner that the capital gains are within ₹1 lakh per financial year. To be noted, here we are talking of ₹1 lakh of capital gains per year and not the quantum of withdrawal per year.

As an illustration, your base investment at the relevant entry NAV is ₹10 lakh. The market value, at exit NAV, is ₹10.9 lakh. In this case, ₹10 lakh is the principal component of your SWP and capital gains is ₹90,000. Provided all the instalments are after a holding period of more than one year, it is exempt from tax as the gains are within ₹1 lakh for that year. Your cash flows, assuming monthly SWP, is ₹10.9 lakh/12 = ₹90,833.

Even if the withdrawal quantum is higher, you will be taxed on LTCG of more than ₹1 lakh for that year. If you can contain the withdrawal quantum as discussed above, your SWP would be tax free.

Conclusion

The usual approach to deciding the quantum of SWP is that it should be limited to the earnings in the fund. People estimate the earnings from the fund, say 10% per year, and withdraw only so much through SWP. The logic is, otherwise, the principal component would be touched for withdrawal.

However, if you are a senior citizen, this is your kitty, this is what you have worked for, in the working phase of your life. Unless you want to leave behind a legacy fund for the next generation, it is ok to utilise your money for your requirements.

You have to estimate a life expectancy, remaining number of years, earnings of the fund and realistically estimate how much of the principal component you can withdraw per year. Your kitty should sustain for the remaining number of years. As an illustration, if you are at age 60 and your life expectancy is 80, you can withdraw a limited amount of principal per year so that that the remaining (invested) amount along with the earnings, sustain you for 20 years.

Tax efficiency, to the extent you can manage it in the manner discussed, enables you to enjoy your kitty entirely.

(The writer is a corporate trainer and author)

Related Topics
comment COMMENT NOW