Decoding the Systematic Withdrawal Plan
Mutual Funds have always been a popular investment choice among all types of investors. Today, you can invest in a wide variety of mutual funds and redeem them conveniently. One way to redeem your funds periodically is SWP. Let us understand what is SWP in Mutual funds in this article.
A systematic withdrawal plan (SWP) is a structured method for withdrawals in Mutual funds. SWP in Mutual Funds allows you to make withdrawals at regular intervals, i.e., weekly, monthly, quarterly, semi-annually or annual, depending upon your requirement.
The amount of withdrawal can be both variable and fixed amounts. With SWP, you may withdraw only the capital gains earned or a fixed amount from your investment.
Here is an example to help understand how a Systematic Withdrawal Plan works.
Assume you have 8,000 units in your Mutual fund, and you wish to withdraw INR 5,000. The NAV of your investment is INR 10 for each unit. On calculation, you will need 400 units to withdrawal INR 4,000. Post withdrawal, you will have 7,600 units.
Now, if your NAV of investment rises to INR 20, you will need 200 units to withdraw INR 4,000. Post withdrawal, you will have 7,350 units left with you.
With each withdrawal, the total number of units you hold decreases. Higher is the NAV of your investment, the lesser units you will need, and vice-versa.
Redemption through a systematic withdrawal plan in Mutual funds is taxable.
If your holding period is less than a year, your investment will be considered a short-term one. Here you will be taxed a Short-Term Capital Gains tax (STCG) of 15 per cent. Conversely, if your holding period exceeds more than a year, you will be liable to pay a Long-Term Capital Gains (LTCG) tax of 10 per cent.
In case your holding period is under three years, it will be considered a short-term investment. The capital gains from the same will be added to your total income, and you will be taxed according to the tax slab you are eligible. On the other hand, if your holding period is more than three years, you must pay an LTCG tax of 20 per cent after indexation.
Opting for SWP in Mutual Funds helps you meet your financial needs with ease as these withdrawals are thoroughly planned and phased out. SWP enables you to access your funds at the right time - when you need them the most.
If you want to invest in mutual funds, download the digibank by DBS app today and choose from over 200 schemes! Also, open your savings account online with us.
*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.