Systematic Withdrawal Plan
What is SWP?
SWP stands for a Systematic Withdrawal Plan that allows an investor to withdraw a fixed sum from their mutual fund scheme over regular periodic intervals such as on monthly basis, quarterly, semi-annually, or annually as per the requirements of the investor. SWP benefits investors who want a second income in addition to their pay from a regular job. Also, it could meet the regular pension needs of the senior citizens after retirement through fixed monthly withdrawals.
Investors can also use SWP for meeting recurring needs like EMIs, house rent, etc. by withdrawing investments regularly as per their needs. This way investors can also earn capital gains on their idle money.
Features of Systematic Withdrawal Plan:
- Tax implications
Any withdrawals made through SWP are considered as a combination of capital and gains on investment. The tax implication only arises for the gain portion of the withdrawals, and no tax is charged on the capital amount withdrawn.
2. Regular Income
An SWP lets an investor get a fixed periodic sum that can help him/her earn a steady income during his/her retirement years or handle educational expenses for his/her kids.
Systematic withdrawal plans lets an investor receive regular income through fixed periodic withdrawals which could help in meeting financial needs after retirement or handling the educational expenses of children.
3. Rupee Cost Averaging
SWPs provide the benefit of the average cost of units through the concept of Rupee Cost Averaging. Also, as investments are withdrawn periodically, the NAVs at the time of withdrawals keep on changing and investors are able to avoid the excessive risks owing to gloomy market conditions which could have been there if lumpsum withdrawal is made, hurting returns.
4. Withdrawal options
A systematic withdrawal plan enables the cash flow to be tailored as per the needs of investors. Investors may also opt to either choose the fixed periodic withdrawal option or the appreciation option. In the former, investors get a fixed amount every
month which includes the principal as well as the amount of the gains. Whereas in the appreciation option, the investors only receive the portion of profits or gain on investments.
5. Long term goals
An SWP option could help in meeting long term goals including recurring needs such as home loan installments, EMIs, school fees of kids, etc. If planned right, SWP withdrawals can be systematically routed to meeting repetitive expenses.
Who can opt for an SWP?
Anyone who has invested in any of the open-ended schemes of mutual funds can choose to initiate a Systematic Withdrawal Plan for a regular cash flow as per the requirements.
SWP Calculation and SWP Calculator
According to the Systematic Withdrawal Plan, a person must have an invested amount in the fund to initiate the SWP plan and start withdrawing a certain amount of the invested corpus over periodic intervals. After withdrawals, the units redeemed will be deducted from the total units as per the NAV price of the fund.
Below is the SWP calculation for an investor who has a capital of Rs.1,00,000 invested in 1,000 mutual fund units as per the current NAV of Rs.100. The investor wants to withdraw Rs.10,000 per month.
|Withdrawals||Amount||NAV||Units redeemed||Units left||Investment value|
Therefore, to make calculations easy, there are many SWP Calculators available online.
Frequently Asked Questions (FAQs)
1. What is a Systematic Withdrawal Plan (SWP)?
A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to withdraw money at fixed intervals from the existing mutual fund investments. The amount to be withdrawn from a systematic withdrawal plan can be defined by the investor as per his needs & requirements.
2. How would I be investing through SWP?
• You can invest lump sum and obtain a fixed payout at fixed intervals that acts like monthly cash flow, i.e. enabling account holders to access their money at regular intervals.
• SWP is tax-efficient for investors in equity funds with a holding period of more than 1 year. This will help them save taxes on dividends which would have been applicable if they had opted for the dividend option. As, LTCG tax is only applicable on gains above Rs.1 lacs in a financial year, an investor with less than Rs.1 lakh gains doesn't need to pay any tax (in case of equity funds).
SWP provides liquidity to the investors through regular withdrawals.
3. What purpose does SWP serve?
The investors use systematic withdrawal plans to create a daily income flow from their investments. Investors seeking income at regular intervals for e.g. funding education expenses of their children often set up their withdrawals in such a way that the cash is available when most needed.
4. What are the benefits of SWP?
- Regular Cash flow– SWP helps to regularly establish a steady flow of income from investments.
- Tax Efficient – Tax is only applicable on the gains portion of the withdrawal not the principal part. Also, LTCG tax of 10% only on gains above Rs.1 lakh.(in case of equity)
- Avoid market volatility – This saves an investor from market instability, since periodic withdrawals ensures average returns & costs.
5. How is SWP from mutual funds taxed?
When the holding period is shorter than 1 year in the case of equity funds, the gain portion of the withdrawal amount would be taxed at a rate of 15%.
On the other hand, if the holding duration is longer than one year, the long-term capital gains would be taxed at 10% on gains above Rs.1 lakh in a financial year.
For Debt funds, if the holding period is less than 3 years, then gains on investment would be considered as Short Term Capital Gains(STCG) and taxed as per the income tax slab rate of the investor.
If the holding period is more than 3 years, then gains on investment would be treated as Long Term Capital Gains(LTCG) and taxed at the rate 20% after indexation benefits.
6. How SIP differs from SWP?
In SIP, you can channel the savings from your bank account into the chosen scheme of mutual funds. SIP is one of the ways to make investments in mutual funds.
Whereas in SWP, you channel your investments to the savings bank account from your invested mutual funds. SWP is a way to withdraw or redeem investments over periodic intervals.
7. Why is SWP a good way to redeem mutual fund investments?
- Only the capital gains from the total withdrawn portion is taxed.
- You can also opt to set up your withdrawal in such a way as to withdraw only the gain made on the value of the investment. It keeps the money invested as you reap the profits at regular intervals, at the same time.
8. How is Rupee Cost Averaging beneficial in SWP?
SWPs help investors benefit by withdrawing their investments at the average cost of units. Rupee cost average gives an investor the average NAV of a mutual fund over many months/years rather than at a single point of time, which would make him dependent on the NAV. This reduces the effect of market volatility.