Enjoying Regular Income Via SWP

Every morning, Ranjan Das sits on his balcony, staring at the sunrise and sipping the tea while enjoying a calm morning with a cold breeze. Yes, you guessed it right, it's mountain life and that’s where Das wanted to be. While he enjoys his nomadic life in the mountains, his monthly expenses are taken care of through SWP, a wise choice he made years ago with his habit of goal-based planning.

This is the story of Das and others who use SWPs to turn their investments into a regular income stream along with enjoying returns on their investments. In today’s blog let’s learn in detail about this amazing tool of cashflow cow in the world of investing.

What is SWP?

A systematic withdrawal plan (SWP) is a tool offered by mutual funds that allows the investors to withdraw a fixed amount at regular time-frame. You can set the withdrawal to monthly, quarterly or annually from your already invested big corpus. You can consider this as an opposite of systematic investment plan (SIP) where you invest regularly. Let’s understand this with the help of an example: Das' investment grew to Rs 1 crore over a period of time, then he desired to take a break from his job and decided to live in the mountains. He set an SWP of Rs 30,000 per month from a fund which had a track record of generating over 15% compounded annual growth return (CAGR). Now this is just like a self-created pension, however you withdraw a little from the corpus and it remains invested and keeps compounding, making the fund last longer.

Benefits of SWP

SWPs are a flexible way to create regular income from your investments instead of a lumpsum uncalculated withdrawal. Here’s why they are popular among the masses:

● Regular Payouts- SWPs are designed to provide a regular cash flow from mutual fund investment which is ideal for professionals whose income is not fixed or depend on seasonality like freelancers. It also provides a retirement cushion for the investors who have retired from the job.
● Customise and Disciplined Withdrawal- SWP offers you flexibility in terms of withdrawal time-frame. You can set the SWP for monthly, quarterly or annual payouts and pause or modify anytime. SWP also encourages financial discipline and let the investors avoid the temptation of redeeming large unit leading to irregular withdrawal.
● No Exit Loads- Although it's not an integrated feature of SWP but most of the funds offer exit-load free withdrawal after 12 months.

SWP Over Traditional Options

Although there are various options available for the people looking to get a regular income. There are fixed deposits (FDs), it is safe but the returns are very limited. Pensions and annuities are rigid and offer lower returns post-tax.

However, the smart tool of SWP has a potential to generate higher returns compared to FDs and annuities. Moreover, it is flexible to start, pause or stop anytime. In FDs, principal does not grow due to regular withdrawal, also the corpus tends to end faster due to low returns.

Rental income on the other hand requires locking-in your investment in properties and maintaining the tenants and properties is another headache.

Moreover, SWP is also tax efficient where only the gains are taxed instead of the entire withdrawal. Let’s understand the taxation on SWP.

Taxation ON SWP

The point here to note is, there is a tax redemption of up to Rs 1.25 lakhs if you hold equity funds for more than 1 year. While doing SWP, you’re selling a part of your investment, hence capital gains tax is applied. And the long-term tax capital gains tax on equity is 12.5% instead of 20% short-term capital gains tax if you redeem equity funds in less than a year. However, taxation is determined on whether the fund is equity oriented or debt oriented.

Now let's simplify it further through an example. When you set SWP for regular income, a part of your withdrawal is your capital and other part is capital gain which is taxed.

So, let’s suppose your SWP corpus is Rs 50 lakh in a mutual fund and its net asset value has grown to Rs 60 lakh. And if you start a Rs 40,000 withdrawal, only the gain portion of each withdrawal will be taxed. The point to highlight here is that SWPs are not tax-free but tax efficient compared to traditional options like FDs.

To your notice there is no tax deduction at source (TDS) on SWP withdrawal for Indian residents. It means that mutual fund companies do not deduct TDS on your SWP, whereas non-resident Indians (NRIs) are liable to get TDS.

SWP is not as easy as it seems due to a complex calculation of your future expenses. To benefit the most from SWP payouts, you can explore the “tax efficient feature” of MINTIT. While following the simple steps you can set your SWP smartly in a right fund to lower your taxes and get regular income.

How Much To SWP

Before you kick-start the SWP, there are a few points to remember. The market risk and a possibility of tax rate change always remain, but there are a few steps with which you can set SWP smartly.

The withdrawal amount is crucial, if you withdraw too much, your corpus will shrink fast. A safe thumb rule is to withdraw 6 to 8% of your corpus annually. So, for a corpus of Rs 30 lakh:

● 6% = Rs 1.8 lakh/year or Rs 15,000/month

● 8% = Rs 2.4 lakh/year or Rs 20,000/month

This range ensures longevity of corpus with market-aligned returns.

SWP is a smart tool to generate regular income from mutual funds, however choosing the right fund for SWP and crafting the right SWP strategy are important.

MINTIT, India’s only dedicated Mutual Fund Platform which caters to your personalised goals and accompanies you to achieve your financial milestones is eager to help you build your wealth. Depending on your profile it can precisely suggest tailored investing plans to achieve your SWP goals.

SWPs are also not for everyone, MINTIT assesses your risk profile and recommends the right time for SWP and a financial strategy to create your SWP fund.

Dividends Vs SWP

Now some folks depend on dividends to generate a regular income. However, it is an inefficient way due the irregular, uncertain and untimely payouts of dividends. Dividends are declared the funds quarterly or annually, hence it is difficult to project a fixed income from dividends.

Moreover, dividends are also not tax efficient in India. Dividends are fully taxed according to your tax slabs which could be as high as 30%. Also, there is a TDS applicable on dividend income above Rs 5,000.

To dive deeper into the domain of dividend income, please stay tuned to our next blog to understand the domain of dividends. You can also refer to detailed and simplified blogs by MINTIT educational library to deepen your understanding of the investing world.