Systematic Withdrawal Plan and its Tax Implications

A Systematic Withdrawal Plan (SWP) is a facility where an investor withdraws a fixed amount periodically from lump-sum investments. The interval of withdrawal can be monthly, quarterly, half-yearly or annually, depending on the investor’s requirements. An investor can opt for this facility if he requires regular income flow to meet his expenditure from his investments instead of withdrawing a lump-sum amount. 

You can apply for a systematic withdrawal plan for different investment options such as equity or debt funds or fixed deposits. For example, you can invest in a liquid equity fund a sum of Rs.10 lakh and withdraw Rs.20,000 monthly. For each fixed amount of withdrawal, the units of the mutual fund will be redeemed as per the day’s NAV, and the balance amount is kept invested in the fund. And for each redemption, the tax will be levied depending upon the type of fund and holding period.

Gain on every withdrawal from mutual funds through SWP will attract capital gains tax. Let us understand the tax implications if the investment is withdrawn through SWP.

Assuming that you withdraw from the debt funds, then calculate the capital gain/loss for every withdrawal. For example, the units redeemed within 36 months of investment, the gain on every withdrawal will be taxed at normal tax slab rates. And gain on redemption of units after 36 months will be taxed at 20 per cent with indexation benefit.

Similarly, if you withdraw from equity oriented-funds quarterly, then the gain on units redeemed within 12 months of investment will be taxed at a flat 15 per cent rate. And gain on redemption of units after 12 months will be taxed at 10 per cent without indexation benefit subject to the aggregate of long-term capital gains exceeding Rs.1 lakh in a financial year.

You can claim the set-off of capital loss against the capital gain of the same year and carry forward the balance loss up to 8 successive years. However, note that long-term capital loss can be set off only against long-term capital gain, whereas short-term capital loss can be set off only against the short-term capital gain and long-term capital gain.

If you withdraw the interest income periodically from the fixed deposit, then the interest income is fully taxable at normal tax slab rates.

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in