SWP: A smart option to generate regular income

Reduction in interest rates has been a dampenerfor all those who preferdepending on regular interest credit as their key source of income.

Historically, a common practiced method to secure a regular income has been those traditional product options that offer both guarantee and timely credit.

The above scenario has therefore now created a space for innovative Mutual Fund based automations like Systematic Withdrawal Plans (SWP) that also provide a similar income credit based on a pre-determined value. SWPs usually come with flexible credit frequency choices that include monthly, quarterly, semi-annually and annual options. Quite similar to an SIP, in an SWP, there are regular fixed transactions that occur based on anagreed frequency that an investor would prefer. However,unlike an SIP where it’s a pay-in and therefore an investment, in an SWP, it is a pay out to the investor – a form of redemption.

While in a dividend option too, AMCs make regular payout to the customer’s account, both the amount of payout and the frequency isn’t guaranteed. In the case of an SWP, the customer has control both on the amount of payout and the frequency of payment just making it easier to plan his finances.

Who can avail the SWP facilities?

SWPs are useful for those looking to get regular income/ payouts, particularly senior citizens. In fact, anyone who prefers a regular flow of income at pre-decided intervals - be it those on a sabbatical, those looking to start their own business, or even those simply wanting to increase their cash flows - can benefit from this option.

Taxation on SWP

An advantage thatSWP investors can benefit fromis that they are tax efficient. In SWPs, the units are cashed out based on the amount of money required in each installment.

If you redeem/withdraw your investments in equity mutual funds after 12 months, your investments would qualify for long-term capital gains tax. Long-term capital gains in excess of Rs 1 lakh are taxed at 10% currently. If you sell your equity mutual fund investments before 12 months, you will have to pay a short-term capital gains tax at a flat rate of 15%.

Debt mutual funds qualify for long-term capital gains tax only if investments are held for three years. The long-term capital gains tax on debt funds is 20% with the inflation indexation benefit on your original investments. If debt mutual fund investments are sold before three years, the short-term gains are taxed as per your applicable income tax slab.

Remember thathe gains from debt mutual fund MF schemes are considered long-term after 36 months. Long-term capital gains are taxed at 20% with indexation*, while short-term capital gains are taxed at individual slab rates* (* plus applicable cess and surcharge if any).

Conclusion:SWPs are normally done on debt funds or liquid funds as they are more predictable compared to equity funds. These are flexible products which an investor can use in the most efficient manner after considering taxation and impact of exit loads.

Disclaimer – This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. This document provides general information on performance; financial planning and/or comparisons made are only for illustration purposes. The data/information used/disclosed in this document is only for information purposes and not guaranteeing / indicating any returns. This material provides general information and comparisons made (if any) are only for illustration purposes. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this document should understand that statements made herein regarding future prospects may not be realized. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes etc. in the document is only for illustration purpose and should not be considered as recommendation(s) from the author or L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates. Recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved. Neither this document nor the units of L&T Mutual Fund have been registered in any jurisdiction except India. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

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