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SWP in Mutual Fund in 2022: Systematic Withdrawal Plan Meaning & Benefits

How does systematic withdrawal plan work in 2022? Read to know the key features and method of investing in SWP.

Many people prefer to have a regular income from their investments as their second source of income. It can be rent from a property, monthly interest from a fixed deposit, dividends from shares/mutual funds, etc. When an individual withdraws a specific amount regularly from their investment, it is known as a systematic withdrawal plan (SWP). In this article, we will focus on systematic withdrawal plan meaning & benefits.

What is SWP in mutual fund?

Systematic investment plans (SIP) and systematic withdrawal plans (SWP) are two important features of mutual funds used by many individuals. During their working years, people contribute a specific amount regularly (usually monthly) to a specified equity scheme/s to build their retirement fund. The process of regular contribution is known as a systematic investment plan (SIP).

On retirement, an individual stops the SIP and starts a systematic withdrawal plan (SWP), the opposite of a SIP. During retirement years, an individual's active income would have stopped. So, they withdraw a certain amount with regular frequency (usually monthly) from their retirement fund. The process of regular withdrawals is known as an SWP.

How does SWP work in mutual funds?

Let us understand how an SWP works in mutual funds with the help of an example. Karishma has accumulated Rs. 5 crores in her retirement fund. She currently needs Rs. 50,000 every month to meet her monthly expenses.

She starts a systematic withdrawal plan (SWP) to withdraw Rs. 50,000 on the 1st of every month. The AMC will redeem units worth Rs. 50,000 from Karishma’s mutual fund scheme and transfer the money to her bank account every month. Every month, Karishma's units will be reduced. 

If the scheme's net asset value (NAV) has gone up, a lower number of units will be required to redeem Rs. 50,000. Similarly, if the net asset value (NAV) of the scheme has gone down, a higher number of units will be required to be redeemed for Rs. 50,000. Karishma can increase the SWP amount every year after factoring in inflation.

Key feature of SWP

A key feature of SWP is that it can either be based on a fixed amount or capital appreciation.

  1. Fixed amount SWP

    As the name mentions, in a fixed amount systematic withdrawal plan (SWP), a fixed amount is transferred to the investor's bank account every month. In the earlier example, we saw how Karishma has built an Rs. 5 crores retirement corpus and has started a fixed amount SWP of Rs. 50,000 per month. So, in this case, the SWP will transfer a fixed amount of Rs. 50,000 to her bank account every month.
  2. Capital appreciation SWP

    In a capital appreciation SWP, only the growth in the original investment amount (capital appreciation) is redeemed and transferred to the investor's bank account. For example, Karishma has deposited Rs. 5 crores in a debt fund and opted for a capital appreciation SWP. In this case, only the capital appreciation amount (growth in Karishma's fund value) over Rs. 5 crores will be redeemed and transferred to her bank account every month. So, in this case, the SWP amount can be different every month, depending on the NAV per unit.

Benefits of SWP

The SWP has many benefits, some of which include:

  1. Regular income

    The first and foremost benefit of SWP is that it provides regular income every month on a specified date in your bank account. During your retirement years, an SWP can replace your salary income. The amount can help you meet your regular monthly expenses.
  2. Flexibility

    SWP provides a lot of flexibility in terms of the amount that you can withdraw, the frequency, the withdrawal date, etc. While setting up the SWP, you can decide the amount you wish to withdraw regularly. You can choose the withdrawal frequency to be monthly, quarterly, yearly, etc. You also have the flexibility to choose the date for the redemption of your units.
  3. No TDS

    There is no tax deducted at source (TDS) applicable for SWP. However, the capital gain amount received through SWP may be exempt/taxable depending on the type of mutual fund (equity/debt) and investment duration.

Who can use SWP?

SWP is useful for people who are looking for a regular income. The SWP regular income can be a secondary source of income to support the primary source of income like salary. The SWP regular income can be a primary source of income for retired people who don’t have any pension.

Tax implications of an SWP

In the earlier section, we have already mentioned that the capital gain amount redeemed from a mutual fund through an SWP may be exempt/taxed depending on the type of mutual fund (equity/debt) and the investment time horizon. Let us understand in detail the tax implications of an SWP.

SWP from an equity mutual fund

Short-term capital gain (STCG) tax:

  • When the SWP amount is redeemed from an equity mutual fund within 12 months of investment, the capital gain will be classified as short-term capital gain (STCG). The STCG tax will be levied at a flat 15% rate.

Long-term capital gain (LTCG) tax:

  • When the SWP amount is redeemed from an equity mutual fund after 12 months of investment, the capital gain will be classified as long-term capital gain (LTCG). The LTCG up to Rs. 1 lakh is exempt in a financial year. The incremental LTCG over Rs. 1 lakh is taxed at 10% without indexation.

SWP from a debt mutual fund

Short-term capital gain (STCG) tax:

  • When the SWP amount is redeemed from a debt mutual fund within 36 months of investment, the capital gain will be classified as short-term capital gain (STCG). The STCG will be added to an individual’s overall taxable income and taxed as per their income slab.

Long-term capital gain (LTCG) tax:

  • When the SWP amount is redeemed from a debt mutual fund after 36 months of investment, the capital gain will be classified as long-term capital gain (LTCG). The LTCG tax will be levied at 20% after indexation benefits.

Conclusion

You can use the systematic investment plan (SIP) feature, during the accumulation phase, to build your retirement fund. Three years before retirement, you can transfer the money to a debt fund. Post-retirement, you can start an SWP to redeem a fixed amount every month to replace your active income.
To start investing in mutual fund schemes as per your appropriate asset allocation and to benefit from features such as SIP and SWP, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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