What is SWP?
In simple terms
SWP is the exact opposite of SIP.
In a SIP you
invest in instalments or EMI and create a Lump sum, in a SWP, you invest a Lump
sum and withdraw in Instalments or EMI.
Let us take an example:
Say, I have Rs.15
lakhs Lump sum. I invest the amount in a Debt Fund of a Mutual Fund. A Debt
Mutual Fund invests money in Bonds and Wholesale Bank Deposits (CD) and hence
is able to give a certain return without volatility. Though returns are not
guaranteed, a certain rate can be assumedin the current circumstances, let us
assume 8% annual return. This means the monthly return is 0.6667%.
Let us assume
that I instruct the Mutual Fund for a SWP of 10000 every month – this comes to
0.6667%. In other words, what I get as a return, I am withdrawing every
monthso my principal amount remains the same.
Instead of
investing in a bond fund , I can also invest in a Balanced Fund where returns
could be 1213% per annum, or Equity Fund giving 1516 %  for a long term
horizon like 510 years. However, this return could fluctuate in the short term
of 13 years. If I need a guaranteed postretirement I can remain invested in
the Balanced/Equity Fund for the long term while going in for Systematic
Withdrawal on a monthly basis. My monthly withdrawal amount needs to be aligned
with the type of Fund that I am initially investing in.
What about Taxation?
Debt funds will
be subject to short term capital gains (at the rate of your Income Tax) for a
period upto 3 years and long term capital gains beyond 3 years (20 % after
indexation)
Balanced and
Equity Funds will be subject to short term capital gains tax of 15 % upto 1year
but are
exempt from tax
beyond 1 year.
Let’s take an
example:
Fund : Debt Fund
Invested Amount
15,00,000
Investment Date
1/1/2017
Date of 1^{st}
Withdrawal 1/2/2017
Assumed Annual
rate of Return: 8%
Monthly Rate of
Return: 0.6667%
SWP Instalment :
10000/ month
Income Tax Rate
10%
Date

NAV

Amount Withdrawn

Units withdrawn

Balance Units

Capital Gains

Capital Gains Tax

Value of Balance Units







10%


01012017

10



150000




01022017

10.067

10000

993.377

149006.623

66.228

6.623

1500001

01032017

10.134

10000

986.798

148019.825

132.018

13.202

1500001

01042017

10.201

10000

980.263

147039.562

197.372

19.737

1500002

01052017

10.269

10000

973.771

146065.791

262.294

26.229

1500002

01062017

10.338

10000

967.321

145098.47

326.785

32.679

1500003

01072017

10.407

10000

960.915

144137.555

390.849

39.085

1500003

01082017

10.476

10000

954.551

143183.004

454.489

45.449

1500004

01092017

10.546

10000

948.229

142234.774

517.708

51.771

1500004

01102017

10.616

10000

941.949

141292.825

580.507

58.051

1500005

01112017

10.687

10000

935.711

140357.114

642.891

64.289

1500005

02112017

10.758

10000

929.514

139427.6

704.862

70.486

1500006













Total Capital Gains Tax


427.6


Prasad wagle
Financial Advisor