Considering systematic withdrawal plan for retirement? Here's how SWP works, how it is taxed and its benefits, explained

If you are a retired salaried taxpayer or investor looking for regular fixed payouts from your mutual fund investment, systematic withdrawal plan (SWP) generates regular and steady income while keeping your remaining corpus invested.

While a popular feature that provides investors either monthly or quarterly (as per choice) encashments of their invested corpus, in order to avail SWP, you need to first invest — either via SIP or lumpsum, in a mutual fund.

SIP or Lumpsum: Build mutual fund corpus for SWP in future

For its convenience, most ordinary investors choose the systematic investment plan (SIP) route to build a sizeable corpus in mutual fund instruments by being consistent over a long-term. Once the fund is in place, and either at a desired time in your life, or during retirement, this fund can be set to disburse a fixed amount on monthly or quarterly basis, as per your needs.

Notably, you can set the amount to be withdrawn and the cycle of withdrawal and both these factors can be updated as per your requirements.

How does systematic withdrawal plan work?

From point of view of your bank balance, the SWP withdrawal can be described as being similar to your pension payout, or dividend amounts. When it comes to your investment, units are sold as per standing instruction to provide your income.

For example, if your set withdrawal sum is ₹10,000 per month, and if the NAV on the particular date is ₹20, a total of 500 units will be sold from your mutual fund portfolio to provide the requested amount.

It is important to note that the units sold will fluctuate depending on the NAV.

What are the benefits of SWP?

• SWP provides a stable and steady stream of income from your investments, while allowing you to manage your expenses without impacting the entire sum.
• It allows flexibility in how much you withdraw and how much you choose to keep invested, facilitating financial discipline even during withdrawal phase.
• It more tax-efficient than interest income gained from traditional options or from lumpsum pension credits into your account. Unlike fixed deposits, SWP are not subject to Tax Deducted at Source (TDS).
• It can be paused, modified, or stopped at any time, depending on your requirements.

Feature of SWP — Key highlights

Tax efficient SWP, here's how

Point to reminder is that mutual fund withdrawals are treated as redemption and will hence be subject to tax rates as applicable for equities or debt depending on your choice of scheme. However, there are ways to make your withdrawals tax efficient.

For debt funds, if you start your SWP immediately, before completion of 36 months the gains would be added to your income and taxed at the applicable tax rates. But if you plan early, and start withdrawing after 36 months, the gains will be treated as long term capital gains (LTCG) and taxed at 20% after indexation. Thus, individuals in the higher tax bracket benefit from early planning.

Understand taxation for SWPs

For each SWP withdrawal, tax is applicable only for the capital gains portion — this means that of you withdraw ₹15,000 of which ₹10,000 is the principle, only ₹5,000 is taxed.

You can also off-set short-term and long-term gains against short and long-term losses, respectively, with carry forward of up to eight years, according to Clear Tax.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.