Strategies To Help You Minimise Your Tax Liability With SWP

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Systematic Withdrawal Plans (SWPs) allow investors to withdraw a fixed sum from their mutual fund investments at regular intervals to meet their cashflow needs. SWP in mutual funds enable investors to set up scheduled withdrawals from their mutual fund investments to generate cash flow. However, while SWPs provide a steady stream of cash flow, they can also have tax implications. Therefore, careful planning is required to optimise SWPs for maximum tax efficiency.Table of contents

  1. Understanding tax implications of investments
  2. Strategies to help minimise tax liability with SWP
  3. Planning for retirement and tax efficiency
  4. FAQs

Understanding tax implications of investments

The tax payable on SWPs depends on the type of mutual fund - equity or debt. For equity funds, if the units are held for over one year, any long-term capital gains over Rs. 1 lakh incurred upon redemption through SWPs are taxed at 10% as LTCG. This makes equity funds a suitable long-term investment compared to debt funds when the holding period is over 1 year. However, short-term capital gains realised from equity fund investments within one year are taxed at 15% as STCG.

In the case of debt funds, the new tax rules effective from April 2023 are important to understand. Any redemptions of debt fund units purchased after April 1, 2023 are taxed according to the slab rate, irrespective of the holding period. However, if the units were purchased before April 2023, long-term capital gains realised after 36 months will be taxed at 20% with indexation benefits.

Strategies to help minimise tax liability with SWP

There are several strategies that can help minimise taxes when using SWP.

  • Use debt funds - Withdrawing from debt funds after 3 years provides indexation benefits, reducing taxable gains but only if you have invested before April 2023.
  • Stagger withdrawals across funds - Withdrawing smaller amounts from different funds helps utilise basic exemption limits fully and may reduce tax brackets.
  • Time withdrawals - Align withdrawals to periods of lower regular income to optimise tax brackets. Withdraw more in years with high expenses to claim deductions.
  • Loss harvesting - Booking losses by switching funds while continuing SWP helps offset capital gains and may reduce tax liability. With careful planning and using tips for SWP tax minimization, investors can incorporate SWPs into their financial plans in a tax-efficient manner.

Planning for retirement and tax efficiency

Retirement planning requires aligning investments to your income needs while optimising taxes. Top tips included are listed below.

  • Segregate portfolios for pre and post retirement. Aggressively invest pre-retirement corpus for growth, conservatively for income post-retirement.
  • Maintain emergency funds in liquid instruments outside retirement corpus to avoid premature withdrawals.
  • Commence SWP payouts on retirement.Withdraw up to the basic exemption limit to ensure tax efficiency.
  • Review and rebalance asset allocation periodically for changing income needs and tax optimisation.

Conclusion
SWPs are a popular way to generate retirement cashflow from mutual fund investments. However, taxes can erode net returns substantially if withdrawals are not planned prudently. Tax optimization with SWP is possible by aligning withdrawals to complement income, harvesting tax losses, and taking advantage of tax exemptions. Investors should understand the tax implications of different assets and use strategies like loss harvesting, withdrawing up to the basic exemption limit, and timing withdrawals to optimise taxes. Periodic reviews of asset allocation and SWP amounts are key to maintaining tax efficiency over time.

FAQs

How can SWP help reduce my tax liability?
SWP allows you to withdraw a fixed amount periodically in a tax efficient manner. You can withdraw up to the basic exemption limit of Rs. 1 lakh per year tax-free if invested in equity funds.

What are the tax implications of different types of investments?
For equity mutual funds held for over 12 months, any long-term capital gains over Rs. 1 lakh earned on redemptions through either through lumpsum or SWP are taxed at 10%. Any redemptions of debt fund units purchased after April 1, 2023 are taxed according to the individual's income tax slab, regardless of holding period.

How can SWP be incorporated into my retirement income plan for tax efficiency?
Using SWP to minimise tax liability requires understanding the taxation of different assets and staggering withdrawals up to the basic exemption limit.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.