Retirement Fund: What is a Systematic Withdrawal Plan and why you should consider it

Systematic Whthdrawal Plan (SWP) is among the many options available today for people to start investing their money and create a corpus for their retirement.

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In simple words, an SWP is a facility that allows an investor to withdraw money from an existing mutual fund at predetermined intervals. The money withdrawn through a systematic withdrawal plan can be reinvested in another fund or retained by the investor in cash.

Simply put, under an SWP, a mutual fund will pay you a specific sum of money at times decided bu you, like each month or each quarter, etc. 

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Like Systematic Investment Plan (SIP) where certain amount gets cut from your account depending on selected date, an SWP is automated and the investor does not have to remember to redeem the required amount. 

Archit Gupta, Founder & CEO ClearTax, said, "One thing to be careful about while using an SWP is the tax implications. SWPs are treated as redemptions and can attract tax, depending on the type of mutual fund and the duration of investment. A retired individual can opt for both SIP and SWP."

According to report by IIFL, which quoted Anjaneya Gautam, National Head - Mutual Funds at Bajaj Capital, who said for instance, Mr. A invests Rs 15,00,000 in SWP and Mr. B invests the same amount in a bond/deposit scheme with 8% interest. Assuming SWP amount is kept at Rs 10,000 per month or Rs 1,20,000 per year or 8% of the investment amount. Also, let’s assume a return 8% in monthly investment plan or SWP. Both Mr. A and Mr. B are in 30% tax slab and continue to get SWP and interest income for 10 years respectively.

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In the above example, Mr. A would have paid Rs 37,537- as capital gains tax, while Mr. B would be liable to pay Rs 3,60,000 as a tax on interest income. Over a 10 years period, they would have got Rs 12,00,000 as SWP amount or interest income respectively. If funds are not withdrawn even after 10 years, Mr. A would have paid only 3.12% tax while Mr. B would have paid 30% tax on Rs 12,00,000 if inflation rate is 6% per annum.

Therefore, an SWP is a very interesting and viable option of investing your money. So, why don't you consider it?