Systematic withdral plan (SWP), can be the best way to generate monthly cash – flexible, very tax-efficient and can be tailored to suit your requirements in the best way out of all the monthly income instruments that abound the markets. Read below:-
SystematicWithdrawalPlan
Lots of investors want to have monthly income in addition to their pension due to personal requirements. I would strongly recommend taking it by investing a bulk in mutual funds and then taking Systematic Withdrawal Plan (SWP). SWP is the most flexible, convenient and tax-efficient way of doing so.
Flexible: You decide on the amount, date you want to get the pension on a regular basis (monthly, quarterly etc), when you wish to start and till when you want it. You can even take out a bulk amount when you want.
Convenient: It can be set up to be as automatic as your regular pension or you could take it when you want.
And very importantly, SWPs are the most tax-efficient way of taking a pension:-
The income you earn as interest in a Fixed Deposit is taxed at a slab-rate, meaning that a person earning Rs 1 lakh as interest on FDs in a year is likely to end up paying upwards of Rs 30,000 if he is in the 30% tax slab.
On the other hand, the same person can pay as little as Rs 5,000 tax on same income from if he uses SWP instead through a debt fund, even if he gets the same rate of interest as the bank FDs. There are two reasons for it:-
1. If one has completed 3 yrs of investment in a debt fund and One yr in Equity fund, it is classified as LTCG (Long Term Capital Gain) and qualifies for concessional taxation. For Debt Funds it is 20% after indexation and for Equity it is 10% only. In Debt funds (which is a more common and naturally better way to have SWPs), the effective rate of tax may work out to be just 5-6%.
2. The second reason is what most of the people (including even many financial planners) don't realise.
Say one bought 10,000 units of a debt fund @10/- per unit for Rs 1 Lakh and it gave 5% returns in the year, ie, Rs 5,000 of profit. Then we take out the profit, ie, Rs 5000.
If it was FD, then for somebody in 30% tax bracket, the tax is Rs 1500 (leave out cess for simplicity sake).
In case of MFs, your number of units do not increase but the value of each of the unit increase by 5%. When you take out any money, you take out the Principal + Interest (called capital appreciation here) together. So when you take out Rs 5,000, only 5%, ie Rs 250, is the appreciation part. This 250 will get taxed at 30%. So you pay a tax of Rs 75!
What is the net effect to you:
You started with Rs 1 Lakh in both cases. You got 5% appreciation in both cases. You took out Rs 5000/- in both cases.
But you paid a tax of Rs 1500 in FDs and Rs 75 in Debt MFs!
SystematicWithdrawalPlan
Lots of investors want to have monthly income in addition to their pension due to personal requirements. I would strongly recommend taking it by investing a bulk in mutual funds and then taking Systematic Withdrawal Plan (SWP). SWP is the most flexible, convenient and tax-efficient way of doing so.
Flexible: You decide on the amount, date you want to get the pension on a regular basis (monthly, quarterly etc), when you wish to start and till when you want it. You can even take out a bulk amount when you want.
Convenient: It can be set up to be as automatic as your regular pension or you could take it when you want.
And very importantly, SWPs are the most tax-efficient way of taking a pension:-
The income you earn as interest in a Fixed Deposit is taxed at a slab-rate, meaning that a person earning Rs 1 lakh as interest on FDs in a year is likely to end up paying upwards of Rs 30,000 if he is in the 30% tax slab.
On the other hand, the same person can pay as little as Rs 5,000 tax on same income from if he uses SWP instead through a debt fund, even if he gets the same rate of interest as the bank FDs. There are two reasons for it:-
1. If one has completed 3 yrs of investment in a debt fund and One yr in Equity fund, it is classified as LTCG (Long Term Capital Gain) and qualifies for concessional taxation. For Debt Funds it is 20% after indexation and for Equity it is 10% only. In Debt funds (which is a more common and naturally better way to have SWPs), the effective rate of tax may work out to be just 5-6%.
2. The second reason is what most of the people (including even many financial planners) don't realise.
Say one bought 10,000 units of a debt fund @10/- per unit for Rs 1 Lakh and it gave 5% returns in the year, ie, Rs 5,000 of profit. Then we take out the profit, ie, Rs 5000.
If it was FD, then for somebody in 30% tax bracket, the tax is Rs 1500 (leave out cess for simplicity sake).
In case of MFs, your number of units do not increase but the value of each of the unit increase by 5%. When you take out any money, you take out the Principal + Interest (called capital appreciation here) together. So when you take out Rs 5,000, only 5%, ie Rs 250, is the appreciation part. This 250 will get taxed at 30%. So you pay a tax of Rs 75!
What is the net effect to you:
You started with Rs 1 Lakh in both cases. You got 5% appreciation in both cases. You took out Rs 5000/- in both cases.
But you paid a tax of Rs 1500 in FDs and Rs 75 in Debt MFs!
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