Systematic Withdrawal Plans (SWPs) have been a method for regular income through mutual fund investments. An SWP enables you to withdraw a specific amount from your mutual fund investment at periodic intervals, generating a steady cash inflow while potentially minimising tax liabilities. Learning how taxation of capital gains is applicable to SWPs is important for investors wishing to enhance their withdrawal strategies.
How capital gain taxation works for SWPs
When you withdraw capital under an SWP, each withdrawal counts as a redemption of units of your mutual fund investment. This redemption set off a capital gain, which is taxed according to the holding period and nature of the fund.
Equity funds
- For an investment duration of less than a year, short-term capital gains (STCG) are taxed at 20%.
- If an investment is held for over one year, gains above ₹1.25 lakh per year are taxed at 12.5% long-term capital gains (LTCG) tax.
Debt funds
If bought before April 1, 2023:
- Short term capital gains (held < three years) are charged at your income tax slab.
- Long term capital gains (held ≥ three years) are charged at 20% with indexation relief.
If bought on or after April 1, 2023:
- Every redemption is taxed as per your slab of income, irrespective of holding period.
Tax-efficient SWP withdrawal strategies
Here are tips to withdraw your capital without having a tax liability.
- Disperse withdrawals over multiple funds
To get the most out of the basic exemption limit and maybe lower your tax rate, spread your withdrawals across multiple funds.
- Plan your withdrawals.
To maximise your tax benefits, schedule withdrawals in years with less predictable income. To get deductions, withhold more in years of high expenses.
- Use debt funds strategically
For debt funds bought prior to April 2023, withdrawal after three years gives indexation relief, lowering taxable gains.
- Loss harvesting
Offset the capital gains by taking losses through fund switching while still maintaining your SWP.
- Consider fund type
Equity funds can be tax-efficient for long-term investments because of reduced LTCG rates, and debt funds offer more consistent incomes.
Using an SWP calculator for tax planning
An SWP calculator aids in estimating what you can withdraw regularly considering taxation. You can estimate how your corpus will be impacted by tax over time by entering your investment information, the amount of withdrawal, and desired returns.
Steps to use an SWP calculator
- Provide your initial investment size.
- Set your withdrawal frequency and amount (e.g., monthly, quarterly, etc.).
- Enter your expected rate of return per year.
- Provide your investment duration.
- The calculator will give estimates of:
- Total investment value.
- Total withdrawn.
- Final investment value.
Example
You have ₹10 lakh invested in an equity mutual fund and want to withdraw ₹10,000 every month through an SWP. An SWP calculator with an assumed return of 8% for five years:
- Investment value: ₹10 lakh
- Withdrawn: ₹6 lakh
- Final Value of Investment: ₹7.4 lakh
The calculator allows you to view how your withdrawals and investments will pan out in the long term, and you can adjust minimise tax burdens.
Conclusion
Managing the tax implications of SWPs calls for careful planning and knowledge of how various types of funds are taxed. By adopting tax-efficient withdrawal strategies and leveraging devices such as SWP calculators, investors can maximise their after-tax returns and sustain a consistent income flow. Always seek the advice of a tax expert to ensure your withdrawal plan fits into your individual financial conditions.
