Systematic Withdrawal Plan (SWP) vs Fixed Deposits (FD)
When it comes to investing money in India, many people consider fixed deposits as the safest and most reliable investment option. However, with the rise of debt mutual funds, the systematic withdrawal option from debt mutual funds has emerged as a more profitable and tax-efficient option for investors.
Systematic Withdrawal Plan (SWP) is an investment option that allows investors to withdraw a fixed amount of money at regular intervals from their mutual fund investment. This option is available in both equity and debt mutual funds. However, for the purpose of this article, we will only be focusing on debt mutual funds.
Here are some reasons why SWP from debt mutual funds is a better option than fixed deposits
1. Tax Deferment:
One of the primary advantages of SWP from debt mutual funds is tax deferment. In fixed deposits, the interest earned is taxed every year. On the other hand, in debt mutual funds, only the capital gains are taxed when the investor redeems the investment. This means that investors can defer the tax payment and let their investment grow without worrying about paying taxes every year.
2. Diversification:
Another advantage of SWP from debt mutual funds is diversification. Fixed deposits are a relatively safe investment option, but they offer low returns. In contrast, debt mutual funds offer higher returns with relatively low risk. By investing in multiple debt mutual funds, investors can diversify their portfolio and reduce the risk of losing money.
3. Lower Rate of Taxation:
The rate of taxation on debt mutual funds is lower than that on fixed deposits. The capital gains on debt mutual funds are taxed at the investor’s income tax slab rate. In contrast, fixed deposits are taxed at the investor’s income tax slab rate, which can be as high as 30%. In SWP withdrawal consist of capital and gain. Only gain part is taxed leading to lower rate of taxation. Below table will showcase the tax saving in SWP vs fixed deposit.
| System | Cap Gain/ | Cap Gain / | Tax | Net Withdrawl | Tax Impact | Tax as % SWP |
|---|---|---|---|---|---|---|
| FD | Interest | 40,00,000 | 27,52,000 | 12,48,000 | 31.20% | |
| SWP | ST | 6,90,185 | 2,15,338 | 37,17,996 | 25,36,662 | 5.49% |
Conclusion
The systematic withdrawal option from debt mutual funds is a better investment option than fixed deposits. It offers tax deferment, diversification, and a lower rate of taxation, making it a more profitable and tax-efficient option for investors. However, investors should consult a financial advisor before making any investment decisions to ensure that their investments align with their financial goals and risk tolerance.
