Hello Sir, Am 75 years old retired person. Am planning to invest in SWP,say ?.100.lakhs, but bit confused on tax treatment. Am planning to withdraw ?.50000/-per month and do not want to alter it. If this discipline is followed,how the tax treatment will be? Will appreciate if you can send me a table illustrating the appreciation for say next five years, assuming prevailing market scenario. Thanks. Vinod B.

Ans: Systematic Withdrawal Plan (SWP) is an excellent choice for disciplined monthly income. Your planned withdrawal of Rs. 50,000 monthly from a corpus of Rs. 100 lakhs offers a stable cash flow. However, understanding the tax implications and projecting growth is crucial.

How SWP Works
Principal and Returns Split: Each withdrawal comprises a portion of your principal and accumulated returns.

Impact on Corpus: The corpus reduces over time unless returns exceed withdrawals.

Flexibility: SWP offers flexibility to adjust withdrawals, but you have chosen discipline, which is commendable.

Tax Treatment for SWP
Equity Mutual Funds
Withdrawals from equity mutual funds are taxed as capital gains.

Gains from investments held for over 1 year are long-term capital gains (LTCG).

LTCG above Rs. 1.25 lakhs is taxed at 12.5%.

Gains from investments held for less than 1 year are short-term capital gains (STCG).

STCG is taxed at 20%.

Debt Mutual Funds
Gains from debt mutual funds are taxed differently.

Short-term gains (investments held for less than 3 years) are taxed as per your income tax slab.

Long-term gains (held for over 3 years) are taxed at 20% with indexation benefits.

Tax Implications on SWP
The tax is levied only on the capital gain portion of the withdrawal.

Withdrawals from principal are not taxed.

Market Assumptions for Illustration
Annual return for equity funds: 10%.

Annual return for debt funds: 6%.

Monthly withdrawal: Rs. 50,000 (Rs. 6,00,000 annually).

SWP Illustration for Next 5 Years

Assuming a 10% annual return on equity mutual funds and 6% return on debt mutual funds, let’s look at the expected corpus growth over the next five years.

In the case of equity-oriented investments, your Rs. 100 lakh corpus would grow significantly. After the first year, assuming an average return of 10%, the corpus would be around Rs. 1.03 crore, despite the Rs. 6 lakh annual withdrawal. In the second year, the corpus would further grow to approximately Rs. 1.07 crore, and by the end of five years, your corpus could reach Rs. 1.20 crore.

For debt-oriented investments, the returns are typically lower. At a 6% return, the corpus would reduce slightly due to the withdrawals. By the end of the first year, your corpus would be approximately Rs. 99.64 lakh. In the second year, the corpus would be around Rs. 98 lakh, and by the end of five years, it could reduce to about Rs. 97 lakh.

Final Insights
With SWP, the key benefit is predictable and regular income, which is ideal for a retired person. However, you need to consider the tax implications on the capital gain portion of your withdrawals. Given the low growth from debt funds, I would recommend an equity-focused strategy to generate better returns over the long term, especially since you are still young enough to take on some market volatility. While equity funds may carry short-term risk, they generally offer better growth over time, which would ensure that your corpus continues to grow while meeting your monthly requirements.

Finally, I would suggest discussing your specific tax liability and withdrawal strategy with a Certified Financial Planner, as they can help optimize your strategy for your retirement goals.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

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