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Functioning of SWP

Kindly tell me how a systematic withdrawal plan works? How much can be withdrawn at a time?
-Pooja

Kindly tell me how an SWP works. How much can be withdrawn at one time?
-Pooja

A Systematic Withdrawal Plan (SWP) is the exact reverse of a Systematic Investment Plan (SIP). That is, you give instructions for redeeming a specific amount of money at pre-determined intervals.

An SWP makes sense if you invest a big sum at the first go so as to withdraw nominal amounts at predetermined intervals. Such a strategy, however, is not recommended in the case of equity funds. In the initial years of an SWP, the gain portion is much smaller as most of the payout actually consists of the principal (investment). Over time, the principal component of the payout decreases giving way to the gain component.

The tax implications of an SWP must be clear to you. In case of short-term gains made in debt funds, the amount of gain would be added to your total income and is taxable at the applicable income tax slab. The longer-term gains would be charged at the rate of 20 per cent (plus surcharge plus education cess) after taking the benefit of indexation benefits (an adjustment for inflation) or 10 per cent (plus surcharge plus education cess) without taking the benefit of indexation. In the case of equity funds, 10 per cent of the gains are subject to a short-term capital gains tax. Luckily, there is no long-term capital gains tax payable on equity funds. There is no upper cap on the withdrawal amount; however, logically you can withdraw only as much as your investment. The minimum withdrawal amount is usually Rs 500, but can vary.


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