What is SWP & How is it helpful?

“The question isn't at what age you retire, it’s at what income you retire” - George Foreman

Gone are the days when retirement used to happen during the 50s or 60s. People, today are on their way to take early retirement. But for this to happen, proper retirement planning takes place. From following a disciplined financial approach to making sure you have enough surplus during your retirement years.

SWPs are attractive because they provide a reliable and consistent source of income. As with a monthly wage, retirees can rest easy knowing they have a steady flow of income to cover their daily expenses. Investing in SWPs gives investors access to the experience of seasoned fund managers. These professionals help investors by navigating the financial system, which greatly minimizes the requirement for ongoing portfolio management.

For Indian investors, SWPs offer an attractive retirement planning option. They provide the possibility of significant tax savings in addition to a steady stream of income. Additionally, SWPs may be your key to a secure and tax-efficient retirement in India if you have the correct plan in place.

What does SWP mean?

SWP stands for Systematic Withdrawal Plan. It is a facility offered by mutual funds where investors can withdraw a fixed or variable amount from their investments at regular intervals. It allows investors to redeem a certain number of units from their mutual fund holdings periodically, thus creating a steady stream of income.

How Do SWPs Operate?

SWP is a great choice for people who need to take out a regular amount of money to cover their expenses. A systematic withdrawal plan operates as follows:

• The first thing an investor needs to do is decide which mutual fund plan they wish to invest in and open an account with the fund houses for investments.
• You choose the investing method, such as a lump sum or systematic savings plan.
• Establishing an SWP is giving the fund house instructions to take a predetermined amount of money from your fund regularly (typically monthly, quarterly, or annually) and deposit it into your bank account.
• The fund house will sell your mutual funds in proportion to the chosen withdrawal amount on the withdrawal date. and your bank account will be credited with it.
• For the duration of the allotted time or until you cancel your SWP, the fund house will keep redeeming your unit.
• Your fund's residual amount will keep making money depending on how well the underlying assets perform. If you keep making SWP withdrawals, your account balance will eventually drop.

Now, consider you started investing 10,000 per month via SIP & you continued it for 10 years. Considering a return of 16%, your accumulated SIP would be somewhere around ?2,964,715. For which you could withdraw 15,000 each month for the next 20 years!

SWPs' tax efficiency

Let's now explore the tax advantages that make SWPs a desirable choice for Indian investors who are concerned about taxes:

Capital Gains Tax:

In equity mutual funds, gains on investments withdrawn in the first year are considered short-term capital gains (STCG) and are taxed at 15%. Long Term Capital Gains (LTCG) are taxed at 10% if redeemed after the first year. In the case of debt mutual funds and SWP, the net gains are added to your income and taxed accordingly.

No Dividend Distribution Tax (DDT): Dividends from mutual funds under SWPs are completely tax-free, which adds another level of tax efficiency to your financial plan. This is in contrast to dividends from stocks.

In India, SWP is particularly helpful for retirees or anyone seeking regular income from their investments.

Overall, SWP can be a valuable tool for investors in India, providing them with a convenient way to generate regular income from their mutual fund investments while benefiting from professional management and potential tax advantages.

Disclaimer : The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose.