How to Enjoy Tax Benefits with Systematic Withdrawal Plan in Mutual Funds? (See Details)

Did you know that besides the Systematic Investment Plan (SIP), mutual funds offer another facility that can generate regular income?

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The Systematic Withdrawal Plan (SWP) allows investors to receive a regular income from their investments in mutual funds.

In this article, we will explore what the Systematic Withdrawal Plan entails and how it functions.

What is a Systematic Withdrawal Plan? 

The Systematic Withdrawal Plan (SWP) is a service offered by Mutual Funds that enables investors to withdraw a fixed amount of money at predetermined intervals, as stated by Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth Limited.

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Retirees are the primary users of this feature as it ensures a consistent stream of income from their investments.

SWP enables investors to withdraw funds from their Mutual Fund accounts regularly, either yearly, monthly, weekly, or even daily.

How does the Systematic Withdrawal Plan work? 

Although investors can take advantage of the SWP facility, they must understand that it impacts their mutual fund account, resulting in a reduction in the number of units held.

Regardless, anyone can begin using SWP.

Here’s how to get started:

– To begin using SWP, the investor must first choose the appropriate mutual fund scheme and then determine the frequency and amount of withdrawals.

– At the designated time, the Asset Management Company (AMC) will sell units from the investor’s holdings in the scheme to generate the necessary cash for the withdrawal.

– Once the AMC sells the required number of units from the investor’s holdings, they will transfer the corresponding amount to the investor’s account.

This procedure will continue until the investor decides to terminate or modify the SWP or until the number of units remaining in the account reaches zero.

When to start a Systematic Withdrawal Plan? 

According to Shweta, an investor should opt for SWP in the following situation:

– For generating regular income

– When an investor is looking to diversify income sources

– Managing retirement income

Why opt for a Systematic Withdrawal Plan?

Investors can opt for SWP for the following reasons:

– To create a source of regular income

– It helps in capital preservation as one can avoid selling all the units at once instead of opting for withdrawal in a systematic fashion.

– It helps an investor diversify the sources of income while investing in equity, which can help beat inflation.

– It also provides flexibility to withdraw. An investor can choose the amount and frequency of withdrawals.

– SWP is better than the dividend option and brings in tax efficiency.

Systematic Withdrawal Plan: Calculation

To illustrate, suppose an investor holds 10,000 units in a mutual fund scheme and wishes to withdraw Rs. 5,000 monthly using the Systematic Withdrawal Plan.

Let’s assume that the scheme’s Net Asset Value (NAV), which is the net value of an investment fund’s assets less its liabilities, is Rs. 10.

Withdrawing Rs. 5,000 would entail selling 500 units, which is Rs. 5,000 divided by the NAV of Rs. 10.

Following this withdrawal, the investor’s mutual fund account would contain 9,500 units (10,000-500).

Suppose that the NAV of the scheme increases to Rs. 20 in the next month, then withdrawing Rs. 5,000 would involve selling 250 units, which is Rs. 5,000 divided by the NAV of Rs. 20.

After this withdrawal, the mutual fund account would have 9,250 units remaining (9,500-250).

As a result, with each withdrawal, the number of units in the mutual fund account would decrease.

Systematic Withdrawal Plan: Tax benefit

Anup Bansal, Chief Business Officer at Scripbox, suggests that SWP is a tax-efficient investment option.

“If an investor initiates an SWP from a debt fund, any capital gains realized during the first two years of investment will be categorized as short-term capital gains and taxed accordingly.

However, if an investor continues to use SWP for more than three years, any gains made after the third year will be deemed long-term capital gains and subject to a lower tax rate,” he explains.

Additionally, no tax is deducted at source for investors when withdrawing funds through SWP.

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