Know if monthly income from systematic withdrawal plans is taxable?

While investing, a lot of information is available for investors on the different types of investment schemes and modes of investment. However, there is not much information available on the withdrawal plans that can be used for those investment schemes. So, investors that invest in mutual funds are not generally aware that they could also choose to withdraw a portion of their investments. That’s why people grudgingly carry on with their investments even in case of emergencies even if they were in need of cash. One such withdrawal scheme is a systematic withdrawal plan or SWP as it is referred to.

What is a systematic withdrawal plan?

A systematic withdrawal plan or SWP is known for allowing an investor to withdraw from their mutual fund scheme every month on a date which is already predefined. Also, this withdrawal amount could be already fixed or could vary. This withdrawal could also be made on an annual, semi-annual, quarterly, or even monthly basis. An SWP helps you to redeem your investment from a mutual fund scheme in a manner which is phased. In contrast to lump-sum withdrawals, this type of withdrawal plan enables you to withdraw money in instalments. In terms of nature, it is also quite the opposite of a systematic investment plan (SIP). While you direct your bank account savings into the preferred mutual fund scheme in a SIP, With SWP, you channel your investments from the mutual fund scheme to your bank account. This withdrawal plan also lets you customise the cash flow from the investment schemes into your account according to your requirements.

How do SWPs work?

Your choice to opt for a systematic withdrawal plan has an impact on your mutual fund scheme as well. Also, it is imperative to note that opting for an SWP is not similar to opening a fixed deposit in a bank, through which you enjoy monthly interests. With FDs, the corpus value is not impacted when you choose to withdraw the interest amount. Conversely, with a systematic withdrawal plan, the value of your fund goes down when the number of units you withdraw.

What are the advantages of SWP?

Listed below are some of the benefits of systematic withdrawal plans:

  • SWPs are very flexible:

In an SWP, you as an investor have the flexibility to choose things like the amount of withdrawal, frequency of withdrawal and the date of withdrawal according to their needs. Moreover, you also have the choice to stop the SWP at any point in time. And you can also add further investments or even withdrawal amounts over and above the fixed SWP withdrawals.

  • There is the benefit of rupee cost averaging:

These plans also help you to take advantage of rupee cost averaging whenever you choose to withdraw a portion of your investments. The phased withdrawal gives you monthly cash flows and gives your capital a longer time period to multiply.

  • SWPs can take care of expenses after retirement:

SWPs are also known for supporting an investor to take care of day-to-day expenses after retiring. With the help of these funds, you can take care of all expenditures whenever you are in need of cash after bidding goodbye to your career.

  • These plans provide income which is required:

These plans automatically withdraw a small portion of mutual fund units every month to meet monthly expenses, regardless of market levels. These plans are known for limiting withdrawals of large sums that might be carried out due to the panic caused during times of a market crash. These plans also withdraw capital whenever a market is setting new record highs. This protects investors from the impulse of investing more capital during the boom periods.

  • Only the gains are taxed, not the withdrawal amount:

In an SWP, a certain amount is withdrawn from the mutual fund scheme on a monthly basis. In cases of every redemption, there is both, a cost and a gain. You are required to pay taxes only on the gain. On the other hand, the entire withdrawal sum is not taxed.