Over the past few years, we have grown familiar with systematic investment plans (SIPs) in mutual funds, but systematic withdrawal plans (SWP) have not received the same fame.

Based on your financial goals, you can choose from a variety of mutual funds that cater to different investment needs. Now, if your goal is to secure a regular income then choosing a SWP in mutual funds is the way to go. This article will explore what SWP in mutual funds entails, its benefits, and why it could be an ideal choice for your investment portfolio.

What is SWP in Mutual Funds?

A Systematic Withdrawal Plan (SWP) allows investors to withdraw a fixed amount from their mutual fund investments at regular intervals, such as monthly, quarterly, or annually. This method is the inverse of a systematic investment plan (SIP), where investors regularly invest a fixed amount in a mutual fund scheme.

SWP in mutual funds is particularly beneficial for those who want a steady cash flow from their investments, such as retirees or individuals seeking additional income to supplement their salary. The withdrawals can be structured according to your needs, making it a flexible and efficient way to manage your finances.

Benefits of SWP in Mutual Funds

1. Regular Income: The primary advantage of SWP in mutual funds is the regular income stream it provides. This makes it an ideal option for retirees or anyone looking to supplement their income without relying on the uncertainties of market movements.
2. Capital Appreciation: While a portion of your investment is being withdrawn regularly, the remaining invested amount continues to grow, benefiting from market appreciation. This dual advantage of income plus growth makes SWP an attractive choice.
3. Customisable Withdrawals: With SWP in mutual funds, you can customise the withdrawal amount and frequency according to your financial needs. Whether you require monthly income or prefer a quarterly payout, SWP offers flexibility.
4. Rupee Cost Averaging: Like SIP, SWP benefits from rupee cost averaging. During market lows, a larger number of units are withdrawn for the same amount, and during market highs, fewer units are withdrawn. This helps in managing market volatility effectively.

See Also: What Are Fixed Income Mutual Funds?

Taxes on SWP In Mutual Funds

When you use an SWP to withdraw funds from your mutual fund investment, the amount you receive is subject to capital gains tax if the Net Asset Value (NAV) at the time of withdrawal is higher than when you initially purchased the units. The type of capital gain—short-term or long-term—depends on how long you’ve held the investment. Here's how taxes on SWP in mutual funds work:

1. Equity Funds:

• Short-Term Capital Gains: If you redeem units within 12 months of investing, the gains are considered short-term and are taxed at 20%.
• Long-Term Capital Gains: If you hold the investment for more than 12 months, the gains are classified as long-term. These gains are tax-free up to ₹1.25 lakh per financial year. Any gains above ₹1 lakh are taxed at 12%.

2. Non-Equity Funds (e.g., Debt Funds):

• Short-Term Capital Gains: Gains from units redeemed within 36 months are treated as short-term and are added to your income. They are taxed according to your income tax slab.
• Long-Term Capital Gains: Gains from units held for more than 36 months are considered long-term. These are taxed at 12.5% with no indexation benefits.

3. No TDS on Capital Gains

Unlike fixed deposits (FDs), dividend-paying mutual funds and other traditional savings options, where tax is deducted at source (TDS), there is no TDS on capital gains for resident individual investors in mutual funds. This means you won't have tax deducted from your SWP withdrawals.

Using SWP in mutual funds not only provides regular income but also offers significant tax efficiency, making it a smarter choice for many investors compared to traditional savings options and mutual fund dividends.

Conclusion

Incorporating a SWP in mutual funds into your financial strategy can provide a steady income stream while allowing your investments to continue growing. Whether you’re planning for retirement, supplementing your income, or looking for a tax-efficient withdrawal method, SWP in mutual funds offers a flexible and beneficial solution. By understanding how SWP in mutual funds works and leveraging its advantages, you can better manage your finances and achieve your long-term goals.

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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.