SWP Option for Your Retirement Planning
By Akhil Chugh
Date October 9th, 2022
All of us wish to lead a peaceful and stress-free retired life free from financial worries.
To achieve this, proper retirement planning is of key importance. This is because your regular source of income will come to a halt once you retire. Interest rates on traditional avenues such as bank fixed deposits and other small-saving schemes have declined. You cannot fully rely on them for your future needs.
So, when you start planning for your post-retirement life, choose investments that can not only protect your capital but also compound wealth, and counter inflation like Systematic Investment Plan (SIP) option in mutual funds.
Likewise for cash-flow post-retirement, the Systematic Withdrawal Plan (SWP) option of mutual funds is an effective way to earn regular income.
What is Systematic Withdrawal Plan (SWP)?
A systematic withdrawal plan abbreviated as SWP is primarily a smart plan that allows you to withdraw fixed amounts of money at periodic and regular intervals from your mutual funds. Just like a SIP, i.e. a Systematic Investment Plan allows you to invest systematically at regular intervals for a large corpus, an SWP allows withdrawal in parts.
An investor can choose from the periodic pay out interval options such as monthly, quarterly, half-yearly or annually, as per individual financial needs. With every withdrawal, the value of the investment made is reduced by those many units and also its market value.
Benefits of SWP:
- Investment Discipline:
With SWP, an investor can automatically redeem some mutual fund units every month to meet monthly expenses, irrespective of market levels. Thus, it protects against withdrawing large amounts from panic/fear during volatile market situations. It allows withdrawals even when markets are experiencing new highs and therefore, protects investors from impulsive investment during boom periods.
- Regular Source of Income:
SWP’s can help your finances by ensuring a steady and regular flow of income as per your chosen period. Therefore, this becomes highly convenient and useful for retirees who need regular cash flow for meeting regular expenses.
3.Enables Rupee Cost Averaging:
Redeeming mutual fund units regularly via SWP makes timing your redemption irrelevant as you benefit from rupee-cost averaging. Though more units will be redeemed in a falling market, you will benefit when the market bounces back.
During market uptrends, fewer units will be redeemed as against when markets are on a downward trend. This allows you to book profit through withdrawal while the investment value of the remaining corpus appreciates.
4.Tax Efficiency:
Since tax is usually payable only on the income component and not the capital component, SWP can be a great way to benefit from tax efficiency. Withdrawals on the SWP are treated as a combination of Capital and Income. SWPs also enjoy tax exemption for up to Rs. 1 lakh on long-term capital gains. The investor needs to pay tax only on earnings in excess of Rs. 1 lakh. In the case of equity funds, tax is to be paid on the gains from equity at 15% on the withdrawn sum if the holding period is less than a year. In the case of debt funds, if it is withdrawn within 3 years, the returns are treated as a part of income and taxed on the basis of the relevant slab rates. On the other hand, if it is withdrawn after 3 years of investment, then the gains from equity mutual funds are taxable at a rate of 20% after indexation, which is, of course, more profitable.
Takeaways
- SWP is a good strategy to have a regular income with some sort of regularity.
- Returns are tax efficient and there is no TDS on gains unlike traditional investment options.
- Net Brokers recommends investors to prefer mutual fund schemes for SWP that are suitable to the risk profile and investment objective.
The path to your blissful retired life will depend on taking prudent investment decisions in the interest of your overall financial wellbeing.
Download our mutual fund app & start investing for your long-term financial goals.
Happy Retirement!