Systematic Withdrawal Plan (SWP)

What is Systematic Withdrawal Plan (SWP)?​

Systematic Withdrawal Plan (SWP) is the facility by which an investor can withdraw a pre-determined amount from his existing investments in mutual funds at a pre-decided interval (weekly, monthly, quarterly, semi-annually or annually). Functionally, Systematic Withdrawal Plan (SWP) is similar to Systematic Investment Plan (SIP) but it gives an option to withdraw systematically. This helps in generating a regular cash flow for the investors. SWP in mutual fund is one of the most effective and tax efficient way to earn potential returns.​

Key benefits of ​SWP

• Tax advantage- In case of investments in equity mutual funds for a period of more than a year, the long term capital gain is exempted. Only short term capital gains are taxable at the rate of 15% (if the total income does not exceed INR 1 Crore) on withdrawals from equity mutual funds investment within 1 year. Whereas in case of investments in debt schemes, the short term capital gain (invested period is less than 3 years) is added to the investors’ income and taxed as per their tax slab. Long term capital gains in debt schemes are taxed at the rate of 20% with indexation. In Systematic Withdrawal Plan (SWP), the tax is paid only on the gains made due to the NAV movement and not on the principal part in the withdrawals making the overall tax incidence lesser. Unlike SWP, in traditional investment options the entire gain is taxed according to the investors’ tax bracket (the highest currently being 30 %) considering if the investor falls under the highest tax bracket.​
• Regular supplemental income- The option of SWP in mutual fund can help you by providing a steady source of income from your investments. This is especially useful for those who need money when their cash flow comes to a halt like retirement, or at a time when supplemental income becomes a necessity due to the altered circumstances in life.
• Meet financial goals- If planned well ahead of time, SWPs can provide a steady flow of money when most needed. They can therefore be linked to long term financial goals, such as providing a steady income in one’s retirement years or managing your child’s educational expenses.

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Who can use SWP?

Systematic Withdrawal Plan (SWP) can be utilized by those who are planning for their retirement in the coming years. Usually the large amount of money that one receives at the time of retirement is invested in traditional savings instruments which attract income tax at the normal rates. Instead, they can make a lump sum investment in mutual funds with SWP facility. In this case, along with earning capital appreciation on the invested amount, he/she can receive a fixed amount monthly. It will help you in getting a regular income like salary even after retirement.​​

​However, the use of SWPs may not be restricted to retirees alone. It is also useful for middle-aged professionals who have the responsibility of their family. They can use SWP option to get a constant source of fund for their dependents. They can plan it for their child’s educational expenses. They can even plan for a constant source of money for their retired parents.​​

SWP calculators are also available. One can easily make all the necessary calculations before investing. The SWP calculator helps in determining the amount to be invested, withdrawal amount and the tenure. It also helps in understanding SWP meaning in mutual fund in a better way.​​

A m​​utual fund SWP is designed keeping in mind the needs, interests and financial goa​​ls of the investors. By judiciously using tools like Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP), you can meet your financial goals without having to go through the hassle of timing the markets and making wrong financial decisions that may cost you dearly and throw you off track. ​​​

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Tax efficiency through SWP​​

WITHDRAW HAPPINESS THAT’S TAX EFFICIENT

Click on Image to see Large picture

Above is the tabular Presentation of HDFC Prudence fund with Initial investment of 1Cr.. and monthly withdrawal of 50000, means you are withdrawing 6% PM and still having left with huge corpus after 3 years

As you can see, withdrawals through SWP are tax-efficient as you only pay 3,233 as tax on your gains, i.e. 0.90% on withdrawals of 3.6 lakhs, as compared to a traditional savings instrument where you pay 1,11,240 on your gains.

Now, there is a further twist in this.. In case you decide to start withdrawing funds after 1 year..
then you need not to pay any tax as all EQUITY LONG term gains are tax free...

Happy Investing..
Sunrise financial services

Disclaimer:- This is a representation of facts, actual returns may vary according to market conditions.

Sources: SBI Mutual Fund Knowledge center