Systematic Withdrawal Plan: How it works and what are the tax implications

Systematic Withdrawal Plan or SWP is a facility through which you can withdraw money from your mutual fund or investment portfolio. The plan is often used by people to generate monthly or quarterly income in their later years. To break it down, if you invest lump sum in a mutual fund or build a big enough corpus, SWP allows you to withdraw a set amount regularly. It also allows you to set the frequency at which you want to withdraw. Under SWP, a person can opt either monthly, quarterly or semi-annual withdrawals. 

How SWP works?

It is exactly opposite to the Systematic Investment Plan or SIP. While SIP allows you to invest in small parts, SWP allows you to withdraw money in the same way. For SWP, an individual needs to invest a particular amount and withdraw a certain amount of the corpus invested each month. After withdrawal, the amount will be deducted from the investment while the remaining corpus continues to accumulate interest.

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For example, if you have a corpus of Rs 2 lakh and decide to withdraw Rs 10,000 per month, your corpus will be reduced by the same amount. 

Why opt for SWP?

It allows you to generate an additional source of income, which can be particularly important post retirement or in case of unemployment. However, the investors need to keep in mind that with reduced corpus, their interest amount will also reduce. 

SWP can be availed on any kind of portfolio, be it a mix of term deposits and mutual fund schemes or stocks and bonds or fixed income securities and other market-tradable securities. The investments can be made as per your risk appetite and return expectation. 

What are Tax implications?

Under SWP, you get tax benefit on long-term capital gains up to the amount of Rs 1 lakh. The investor will be liable to pay tax only on the gains over and above Rs 1 lakh.