A systematic withdrawal plan (SWP) from a mutual fund can deliver regular income with tax efficiency. An SWP is the mirror image of a systematic investment plan (through which investments are made regularly).
With an SWP, one can withdraw a fixed amount every year from a mutual fund. An SWP can be set up in any mutual fund scheme. However, the tax benefits are maximised if it is a fund with less than 65% in debt. Such funds attract 12.5% long-term capital gains tax after one or two years, depending on the extent of equity in the fund.
For example, you can withdraw ₹30,000 per month via an SWP from an amount of ₹50 lakh invested — an 8% withdrawal rate. The SWP may deplete the fund slower or faster, depending on the returns. In the long term, equity is assumed commonly to deliver a return of 12%. If you set the SWP rate well below 12%, your corpus may not erode over time.
A major benefit of SWP is tax efficiency. Every withdrawal is considered part-capital and part-return and hence not fully taxed. If you withdraw ₹5 lakh from a ₹50 lakh investment, it may be that only ₹1 lakh is a taxable gain and the rest is considered capital return and not taxed. This cuts down the effective tax payable compared with fixed deposits, for example.
Harshad Chetanwala, co-founder of MyWealthGrowth.com, explains that an SWP is particularly useful for clients in the post-retirement phase, offering them a way to withdraw money from their portfolio in a structured manner while maintaining an appropriate asset allocation.
A higher withdrawal amount might seem appealing. However, Chetanwala emphasises the importance of reviewing and adjusting this amount regularly.
“Many retirees overestimate their expenses at first, but a realistic assessment
Read more on livemint.com