Systematic withdrawal plan (SWP) allows you to withdraw a fixed sum from your mutual fund investment on a predetermined date. The withdrawal can be done on a monthly, quarterly, or annual basis, as per your wish.
The SWP option is slowly gaining popularity of late as it offers a constant regular inflow of money from equity funds. The investors can now optimize their tax on LTCG (long-term capital gains) accumulated on the sum withdrawn as SWP, considering it remains less than the threshold of Rs 1 lakh.
Consider the following example; you invest Rs 25 lakh at an annual rate of return at 12%. You receive Rs 25,000 each month and this amounts to Rs 3 lakh a year. The tax exemption on profits per year is capped at Rs 1 lakh.
For the rate of return at 12% per annum, you are liable to pay a tax of 2% of the sum withdrawn in the 1st year as per the rules of short term capital gains tax.
You will be liable to pay long term capital gains tax only by the 4th or 5th year, this is because your profits would exceed Rs 1 lakh by then. Your tax liability would be around 1% of the sum withdrawn. You are liable to pay taxes only if your gains exceed Rs 1 lakh.
Engineer by qualification, financial writer by choice. I am always open to learning new things.