We have discussed the concept of SIP earlier wherein we discussed about systematic investment method through which one can invests periodically in the markets. There is another term that used widely in world of mutual funds which helps you in understanding and matching your goals as per your requirements.

A Systematic Withdraw Plan is the facility offered to the investors which allow them to withdraw a pre-determined amount at regular intervals from his existing investments. The SWP is opposite to SIP as it gives option to withdraw systematically. One can use this strategy to deal with market fluctuations. It allows an investor to customize the cash flow as per their requirements which generate regular flow of income.

Benefits of Systematic Withdraw Plan (SWP) are:
  • The withdrawals or redemption of units in SWP are free from tax deduction at source. However, the amounting gains are taxed on withdrawable amount.
  • There is tax advantage in SWP option because only gains are taxed and not the whole amount. One can choose to withdraw only the gains and remain invested in the fund at the same time. This is known as appreciation withdrawal.
  • The fixed withdrawal helps in planning their financial requirements in phased manner.
Tax Implications of SWP
  • In case of equity funds, if the holding period of investments is less than one year then the withdrawable amount gains is taxed at rate of 15 percent whereas, if holding period is more than one year then the amount of long-term capital gains is taxed at 10 percent.
  • In case of debt funds, if the holding period is less than three year (36 months), the amount that withdraws gains will be taxed as per income tax rate slab of the individual whereas, if the holding period is more than 36 months, then long term capital gains will be taxed at rate of 20 percent along with benefits of indexation.

To conclude, the SWP is preferred mode of regular flow of income which facilitates retired persons to substitute it as pension along with this it is tax efficient for investors.

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