I have 1 Cr corpus in various equity mutual funds, except ELSS scheme, accumulated through SIP. I want to convert this corpus into SWP within ione to two years. Will it be taxable? If yes, how much tax should I have to pay? Is there any way to save the tax?

Ans: 2 crores

Ans: Hello Vikas & thanks for writing to me. I am assuming you are looking for a consistent source of cash flows for monthly expenses etc.

Withdrawing 1% a month/12% a year seems aggressive, and such aggressive withdrawals may stunt the growth of your corpus, causing you to withdraw more from your principal amount instead of any accrued gains, causing you to deplete your corpus earlier than planned. Half a percent or quarter of a percent of your corpus, that is Rs.50,000 or Rs.25,000 is a much better figure to withdraw, as it leaves potential for your corpus to grow faster than withdrawals.


You can consider investing in hybrid funds like balanced advantage/dynamic asset allocation funds, multi asset funds, aggressive hybrid or conservative hybrid funds or a mix of debt, equity & hybrid funds, based on your specific needs.

Ans: STP (Systematic Transfer Plan) and SWP (Systematic Withdrawal Plan) are essential tools for managing your investments. They help in transitioning your investments smoothly and providing regular income. Understanding these concepts is crucial, especially as you approach retirement.

Systematic Transfer Plan (STP)
STP allows you to transfer a fixed amount or units from one mutual fund to another within the same fund house. This is particularly useful when shifting from equity to debt as you near retirement.

Equity to Debt Transition: By transferring systematically, you reduce the risk of market fluctuations. Moving lump sums can expose you to market volatility. STP mitigates this by spreading the transfer over time.

Tax Efficiency: Capital gains from equity funds held for over a year are taxed at 10% if gains exceed Rs 1 lakh. STP does not eliminate tax but spreads it out, reducing the tax impact.

Ideal Usage: STP is ideal for transitioning from a growth-oriented equity fund to a more stable debt fund as you approach retirement.

Systematic Withdrawal Plan (SWP)
SWP allows you to withdraw a fixed amount from your mutual fund investment at regular intervals. This is useful for generating a steady income during retirement.

Regular Income: SWP is like a salary from your investment. You decide the amount and frequency of withdrawal.

Tax Efficiency: Each withdrawal in SWP is considered a part sale of your investment. For equity funds held for over a year, the tax is only on the gains portion, which is more tax-efficient compared to withdrawing lump sums.

Capital Preservation: If planned well, SWP can provide income without depleting your capital significantly, ensuring sustainability.

Strategy for Using STP and SWP Post-Retirement
Building a Retirement Corpus
If you have built a corpus of Rs 1 crore through SIP in equity mutual funds, shifting this to debt funds to generate regular income is a smart move. Here's how to do it efficiently:

Initiate STP Before Retirement: Start the STP from your equity fund to a suitable debt fund 2-3 years before retirement. This gradual transition ensures that your corpus is not hit by sudden market downturns.

Post-Retirement Income via SWP: Once the corpus is in debt funds, initiate an SWP to generate monthly income. Choose an amount that covers your expenses without depleting the capital too fast.

Tax Planning: The gains on your debt fund (from STP) will be taxed as per your tax slab if held for less than three years. If held for more than three years, the gains are taxed at 20% with indexation benefit. Plan withdrawals in a way that minimizes tax impact.

Tax Implications
Capital Gains Tax on Equity to Debt Transfers
Transferring funds from equity to debt attracts capital gains tax on equity. Even with STP, each transfer is considered a sale, and if the gain exceeds Rs 1 lakh, it is taxed.

Long-Term Capital Gains (LTCG) Tax: For equity, gains over Rs 1 lakh are taxed at 10% without indexation if held for more than one year. For debt funds, LTCG tax is 20% with indexation if held for more than three years.
Managing Corpus in PF or PPF
Provident Fund (PF): Upon retirement, you can withdraw your PF corpus. However, lump-sum withdrawal might push you into a higher tax bracket. Consider staggered withdrawals or invest the lump sum in a debt mutual fund and then start an SWP.

Public Provident Fund (PPF): PPF matures in 15 years and is tax-free. You can withdraw the entire amount tax-free, but it’s wise to invest this corpus in a debt fund and initiate an SWP to generate regular income.

Steps to Implement Post-Retirement Income Strategy
Review Your Corpus: Assess the total corpus in equity, PF, and PPF.

Start STP Early: Begin shifting equity to debt 2-3 years before retirement. This reduces risk and tax impact.

Set Up SWP: Once in debt funds, set up an SWP to start drawing regular income. Ensure the withdrawal rate is sustainable.

Monitor and Adjust: Regularly review your withdrawal strategy. Adjust the amount based on fund performance and your needs.

Final Insights
Building a retirement corpus through equity is wise, but transitioning to debt and generating income requires careful planning. STP and SWP are effective tools, but they do not eliminate tax liabilities. Understanding these nuances helps in making informed decisions. For your PF or PPF, consider staggered withdrawals or reinvesting in debt funds to ensure a tax-efficient, steady income.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

Ans: Hello;

Supposing you are doing SWP from an equity scheme after 11 years then the SWP will be treated as long term capital gain with 12.5% tax on amount over
1.25 L in a financial year.

However the bigger concern of having your retirement corpus in equity funds is that during market drawdowns you may eat into and deplete your corpus.

Best wishes;

Ans: You are 42 years old and planning to retire by 2030.

You have a corpus of Rs. 2 crores.

You are investing Rs. 1.15 lakhs per month through SIPs.

You are also withdrawing Rs. 1.15 lakhs per month through SWP.

Your expected monthly expenses in retirement are Rs. 2 lakhs.

This is a well-structured plan, but some adjustments are needed.

How Much Will Your Corpus Be in 2030?
Your current corpus of Rs. 2 crores will continue to grow.

Your ongoing SIPs will add to this corpus.

Your SWP withdrawals will reduce the corpus.

Market returns will impact the final value.

Assuming a reasonable return, your corpus can grow to around Rs. 4.5 - 5 crores by 2030.

If the market performs well, it may be slightly higher.

If returns are lower, it may be slightly less.

This estimate considers the impact of both SIPs and SWPs.

Will Rs. 2 Lakhs SWP Be Sustainable?
Your withdrawal rate should not deplete your corpus too soon.

Rs. 2 lakhs per month means Rs. 24 lakhs per year.

If your corpus is Rs. 5 crores, this is about 4.8% withdrawal per year.

This can be sustainable if your portfolio earns more than this annually.

Inflation needs to be factored in, as expenses will rise over time.

Proper asset allocation is key to ensuring sustainability.

Changes to Consider Before Retirement
Reduce equity exposure gradually: As you approach retirement, shift some funds to safer assets.

Build a contingency reserve: Keep at least 2-3 years of expenses in a safe, liquid investment.

Ensure tax-efficient withdrawals: Plan SWP withdrawals to minimize tax outflow.

Review insurance needs: Ensure you have adequate health insurance coverage.

Monitor investment performance: Review your portfolio every year and adjust allocations.

Asset Allocation After Retirement
You need both growth and stability.

Keep a portion in equity for long-term growth.

Allocate a part to debt funds for stable income.

Maintain liquidity for short-term expenses.

Avoid overexposure to any single asset class.

A well-diversified portfolio will ensure financial security.

Tax Planning for SWP Withdrawals
Long-term capital gains (LTCG) above Rs. 1.25 lakh are taxed at 12.5%.

Short-term capital gains (STCG) are taxed at 20%.

Debt mutual funds are taxed as per your income tax slab.

Plan SWP withdrawals to reduce tax impact.

Use a mix of investments for tax efficiency.

Final Insights
Your current plan is strong, but some refinements are needed.

Ensure your corpus is allocated wisely before retirement.

Review and adjust your withdrawal strategy for sustainability.

Plan for inflation and rising expenses over time.

Keep a regular check on market conditions and your portfolio.

A structured approach will ensure financial independence post-retirement.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment