Stay invested as you draw a steady income

SWPs allow withdrawal of a fixed amount from MF investments at pre-decided intervals

Investors nearing retirement or retirees wanting a regular stream of income can opt for Systematic Withdrawal Plans (SWPs) in mutual funds.

The SWP facility allows investors to withdraw a pre-determined amount at pre-decided intervals from their mutual fund investments.

An SWP is the opposite of a Systematic Investment Plan (SIP) where you invest a fixed sum at regular intervals.

With an SWP, you can customise the cash flow as per your requirement — withdraw either the capital gains on your investment or a fixed amount.

The withdrawal can be either weekly, monthly, quarterly, half yearly or yearly. SWPs are allowed only in open-ended funds.

How it works

Investors can start SWPs from the schemes they have invested in by sending a filled application form to the asset management company’s (AMC) investor service centre or to the R&D agent.

Some online distributors and R&D agents such as CAMS and MF Utility enable investors to start SWPs online through their web portals and mobile apps. On the SWP date, units of your fund with a value equivalent to the withdrawal requirement are sold, and the proceeds are credited to your bank account.

This helps the investor to remain invested in the scheme which can earn market-linked returns, as well as enjoy regular income.

Just like SIPs, you can get the benefit of cost averaging — selling more units when the markets are down and less when the markets are up.

Selection of the right scheme based on your risk profile, taxation and the time of income requirement will help reap the maximum benefit. Investors with a high risk profile can invest in equity funds and investors with a low to medium risk appetite can choose to invest in funds from the debt or hybrid categories.

Many AMCs allow only fixed-sum withdrawals. However, AMCs including HDFC, Aditya Birla Sun Life and Kotak also allow investors to withdraw the capital appreciation.

SBI Mutual Fund, through Bandhan SWP, allows investors to re-route the SWP amount to the account of their family members.

All AMCs allow SWPs in equity-linked saving schemes (ELSS) post the lock-in period of three years.

Optimise taxes

SWP withdrawals from mutual funds attract tax. As per the current tax structure, redemptions made from equity-oriented funds within 12 months from the date of investment attract short-term capital gains (STCG) tax at 15 per cent. Redemption after 12 months qualifies for long-term capital gains (LTCG) tax at 10 per cent.

On the other hand, sale of debt funds units within 36 months attracts STCG tax, which is taxed as per the investor’s income-tax slab; sale after 36 months qualifies for LTCG tax at 20 per cent with indexation.

Hence, starting SWPs in equity-oriented fund after a year and in debt funds after three years from the date of investment will help lower your tax outgo.

SWPs in growth option score over the ones in dividend option on the taxation front.

Under the growth option in equity funds, investors can continue to claim tax exemption on LTCG of up to ₹1 lakh in a financial year.

So, small investors won’t have to pay tax if their LTCG is below ₹1 lakh. But this is not the case with the dividend option.

Any dividend declared in equity funds attract Dividend Distribution Tax (DDT) for retail investors at the rate of 11.65 per cent (10 per cent, plus surcharge and cess). In debt funds, DDT is 29.12 per cent.

Conservative investors falling under the highest tax bracket can consider investing in debt funds and opting SWPs after three years, to help lower their tax outgo.

You can also cancel an SWP. The cancellation request must be submitted 7-15 days before the next SWP due date.

SWPs will terminate automatically if no balance is available in the scheme or if the enrolment period expires.

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