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How Can You Go For Systematic Withdrawal Plan(SWP) Easily?

Personal Finance

When we all reach adulthood, we start realizing the importance of savings and investments. Every individual has a different perspective on the same.

Several people like to invest huge amounts of money in one particular place, whereas some choose to move ahead with a systematic investment plan. Many investors also wish to see capital growth, whereas some wish to receive regular income from their made investments.

Considering investors’ different needs and requirements, one such facility offered by multiple banks is a systematic withdrawal plan.

What Is A Systematic Withdrawal Plan?

A systematic withdrawal plan is very different from a systematic investment plan. A SWP in mutual fund lets you reap financial benefits from your investments promptly. The SWP plan helps you withdraw money in instalments, which makes it different from SIP.

A systematic withdrawal plan also allows you to customize the cash flow as per your needs; you can withdraw just the capital benefits of the investment or even a fixed amount. This plan helps ensure you have your money invested and receive regular returns. It is also important to note that the money you withdraw from SWP plan can be used to reinvest in other funds or consumed by you in cash.

What Is The Need For A Systematic Withdrawal Plan?

We all know there is a high chance of losing the profits of mutual funds due to market fluctuations. This means you can lose the profits that have hit the chart if not consumed or withdrawn on time.

A SWP plan can directly impact your mutual investments. This means that the profits will be reaped on time, and you can get the withdrawals as per your financial needs. An SWP will ensure the availability of funds for you whenever needed.

An SWP can also help all investors to open doors for a second source of income apart from their salary. Along with SWP, you can create a regular source of cash flow with the help of your investments and anticipate a periodic income to use that finance for your leisure such as travel, dine-out, shopping, etc.

A systematic withdrawal plan can also act as a freedom of cash during retirement. You can withdraw money from your existing mutual fund investments at alternate intervals such as monthly, weekly, quarterly, annually, or even half-yearly.

How To Make The Best Use Of SWP?

An SWP ensures a regular cash flow from the end of a market if an investor has a particular amount in the investment. Although it is suggested that the investors start their SWP plan in their equity scheme at least one year after the investment to be saved in a short-term gain of capital tax of at least 15%.

If you plan things better financially, SWP will also add to your finances every year. Since you started your investment 5-7 years back, this amount will help you reap the capital appreciation and a larger quantum of regular cash flow.

Apart from your mutual fund schemes, you can also merge the investments made by SIP with the SWP feature whenever you’d like. If you have started your investment with a SIP till your retirement and do not wish to invest more, you can opt to discontinue the SIP but ensure not to stop complete redemption.

Instead, activate an SWP plan over your SIP to receive the benefits of a sizeable amount of income. This way, it will become a regular cash flow for you like a pension plan, and you can sustain it for a long period because your capital will remain invested and will also keep on appreciating.

The System Of Taxation Via SWP

The regular consumption of finances with the help of the SWP feature is subject to tax. If your investment in equity funds is available with a holding period of less than a year, your short-term benefits will result from redemption through SWP and will attract an STCG tax of around 15%.

But if you hold the investment for more than a year, your gain can be over 100,000, and it will be released after applying a tax of LTCG of 10% without the indexation.

In this scenario, if you realize that your unit with an LTCG of 125,000, you may not have to pay the taxes on the first finances of 100,000, but the rest of 25,000 will be taxed at 10%, ultimately resulting in a tax of 2500+ applicable cess charges.

Whereas on the other side, on your debt funds, if your investment holding is less than 3 years, your capital gains that are made through the SWP will be given to your income and will be taxed as per your particular income tax slab rate.

If the holding is for more than 3 years, the capital can be long-term and will also attract a 20% of tax with the indexation.

Irrespective of all, such regular withdrawals are not always subject to the TDS as is also the case with fixed deposits.

Summing Up

A systematic withdrawal plan can be one of the most effective ways to generate regular and planned cash flow. It can also be planned to keep your future financial goals in mind.

Moreover, an unplanned way of implementing the strategy of SWP plan can prove to be of loss, so make sure you plan your investments wisely.

To know more visit Piramal Finance and read further articles on finance-related topics.