An investor wants to know how tax is calculated on the Systematic Withdrawal Plan of debt funds...
24-Mar-2009 •Research Desk
I would like to know how tax is calculated on the Systematic Withdrawal Plans of debt funds. It is worth investing around Rs 6 lakh in a debt fund and then starting a Systematic Withdrawal of Rs 20,000 per month considering that I come in the highest tax bracket? -Purushottam Pandit
In a Systematic Withdrawal Plan (SWP), each withdrawal is taxed according to the period of its holding. If the investment was made in a lump sum and then a SWP is carried out, then the period of holding will be calculated from the date of investment of the lump sum amount and if an SIP was done while investing, then the First In First Out (FIFO) method will be followed.
If the period of holding is less than one year, then it will qualify for short-term capital gain tax and if the period of holding exceeds one year, then it will qualify for long-term capital gain tax. For a debt fund, long-term capital gain tax would be 11.33 per cent without indexation or 22.66 per cent with indexation. The short-term capital gain on a debt fund is added to one's income and is taxed as per the applicable tax slab of the investor.
Coming to your next question, if you invest Rs 6 lakh (lump sum) in a debt fund and then start a SWP of Rs 20,000 per month, then you will have to pay a short-term capital gain tax on the amount withdrawn within one year. It will be added to your income and will be taxed at 30 per cent since you come in the highest tax bracket. The amount withdrawn through SWP after one year will qualify for long-term capital gain tax. If your objective is to save taxes, then you must start the SWP after a holding period of one year as short-term capital gain tax will be higher in your case as compared to long-term capital gain tax.