A systematic withdrawal plan (SWP) is a facility to withdraw funds from a mutual fund in a phased and planned way. An investor can withdraw a fixed amount at regular intervals by using the SWP. You can also choose to withdraw only the gains on your investment and keep the capital intact.
Types of SWP
- Fixed amount SWP – Here you fix the amount to be withdrawn on a specific date.
- Appreciation SWP – Here you withdraw only the gains from the mutual fund scheme i.e. returns earned and not the invested amount.
How SWP works
Let us understand how a SWP works with an example. Suppose Nita invested money in a mutual fund and the value of the investment today is Rs 4 crore. Nita needs a regular income of Rs 50,000 per month after her retirement. In this case, she can set up a SWP with the mutual fund house. Every month a sum of Rs 50,000 will be transferred to her bank account.
The value of the SWP is determined by the units in the mutual fund scheme and the NAV of the scheme. Suppose in the above example, the NAV is Rs 10 Nita will sell 5,000 units to receive the amount of Rs 50,000. Now if the NAV increases to Rs 25, Nita will sell only 2,000 units to receive Rs 50,000. So the value of NAV will determine the number of units left in your fund after every withdrawal. The number of units will keep reducing with every withdrawal until they become zero. The higher the NAV, the lower the units redeemed and vice-versa.
Benefits of SWP
- Regular Income – A SWP provides regular income. It is very useful for people who need funds to meet regular expense.
- Flexibility – You have the flexibility to choose the amount, frequency and date according to your needs. Also you can stop the SWP anytime, add more investments or withdraw amount over and above the fixed SWP withdrawals.
- Capital Appreciation – Where the SWP withdrawal rate is lower than the fund return, the investor gets some capital appreciation as well.
Taxation of SWP in India
- All withdrawals from mutual funds are taxable.
- SWP from equity mutual funds – where SWP was from a equity mutual fund held for more than one year, the amount will be taxed as long term capital gain. If the SWP was from equity mutual fund held less than one year, it will be taxed as short term capital gain.
- SWP from debt mutual funds – where SWP was from a debt mutual fund held for more than three years, the amount will be taxed as long term capital gain. If the SWP was from debt mutual fund held less than three years, it will be taxed as short term capital gain.
- There is no tax deduction at source (TDS) on SWP.
