Income Watch. Money on tap, when you need it

The systematic investment plan (SIP) route to mutual fund investing helps the investor to generate a corpus by investing sums at regular intervals over time.

In the same manner, if you require regular cash flows to meet your monthly expenses, you can use a systematic withdrawal plan (SWP) to withdraw from your corpus. SWPs help you get the liquidity of traditional investments such as fixed deposits (which have regular interest payouts) as well as higher post-tax returns compared with fixed income instruments. Once you have created a good corpus, you can withdraw as much as you want and whenever you want, using the SWP facility.

Assume, for instance, that you have invested ₹10 lakh in an equity mutual fund scheme at an NAV of ₹10 per unit. Your current holding is one lakh units. In case you are looking for a regular monthly pay-out of ₹10,000, proportionate units based on the NAV prevailing on that day are deducted from your mutual fund folio and money is credited into your account.

If the NAV on the first pay-out date is ₹10.1, the total value of investment is ₹10,10,000. Given that you need ₹10,000 a month, 990 units will be deducted from your mutual fund folio. The total balance, post the pay-out, will be 99,010 units. Likewise, on the subsequent pay-out date, if the NAV is ₹10.5, then 952.4 units will be deducted from your MF folio (₹10,000 divided by the prevailing NAV of ₹10.5). The total units in the account after the second pay-out will be 98,057.52.

In case you opt for SWP in an equity fund, there is no tax if you start withdrawal after one year from the date of investment. In case you choose to withdraw within a year, you need to pay short-term capital gains tax of 15 per cent plus surcharge and cess (15.45 per cent).

But this tax is only on the profit made and not for the entire withdrawal. For instance, in the above example, the tax on the first instalment of the withdrawal will be ₹15.3 (15.45 per cent of ₹99, which is ₹0.1 multiplied by 990 units). Similarly, tax on the second pay-out is ₹74 (15.45 per cent of ₹476, which is ₹0.5 multiplied by 952 units).

Given that the tax is paid only on the profit component, the SWP facility makes debt mutual fund schemes better than other monthly pay-out investment options, such as fixed deposits where the entire interest payout is taxed. Withdrawal within three years from the date of investment in the case of debt funds is taxable at the individual’s slab rate, while withdrawal after three years attracts a tax of 20 per cent after indexation on the profits made.

SWP is also better compared to the dividend option. Dividend declaration is done at the discretion of the fund manager and there is no guarantee on the quantum and periodicity.

Even in monthly income plans where dividend payments could be somewhat regular, you may heve to consider the tax aspect. Dividend payout from debt funds is taxable at 28.84 per cent. However, in the case of SWP, short-term capital gains tax is only on the profit component and is taxable at the individual’s applicable tax rate. This will benefit those in the 10-20 per cent income tax slab.

The SWP facility is offered by all mutual fund houses across equity and debt schemes. All you need to do is make a request for SWP facility by filling up the specified form. You need to specify the scheme and the frequency of withdrawal and the time period for which you want to withdraw.

The pay-out periodicity is weekly, monthly, quarterly, half-yearly and annual. You can opt for a perpetual time period, which means you will get the monthly payment till the entire investment is redeemed.

You can choose the date of every month for redemption. Similar to SIP, most fund houses give you the option to choose from the 1st, 5th, 10th, 15th, 20th and 25th of every month. You can modify or cancel the SWP option by filling up the cancellation form. SWP is a good option for senior citizens who have invested in mutual funds and need steady cash flows.

However, since it is a pre-determined withdrawal date, the redemption happens independent of market conditions. So, in a bear market, you may be better off redeeming at one go and parking money in safer fixed income options.

Hence, it is important to keep tabs on the corpus and the gains/losses made, and review the SWP subscription, if needed.

The author is co-founder, RaNa Investment Advisors

COMMENT NOW