Learn how a Systematic Withdrawal Plan (SWP) can help you create a steady income stream for your retirement, offering flexibility, tax efficiency, and potential growth.
What is SWP?
An SWP, or Systematic Withdrawal Plan, allows you to withdraw a set amount of money from your mutual fund at regular intervals, like monthly or quarterly, by automatically selling some of your units.
How does SWP work?
Let’s understand this with the help of an example:
Meet Raj, who has been diligently investing in a mutual fund that offers SWP over the last 30 years of his career.
Now that Raj is retiring, he wants to ensure a steady stream of income instead of withdrawing his savings all at once.
He decided to set up a Systematic Withdrawal Plan (SWP) after retirement for 30 years to help manage his finances during retirement.
Here’s how Raj sets up his SWP
| Total Investment | Withdrawal Amount | Investment Period |
| 80,00,000 | ₹40,000 per month | 30 years |
SWP Calculator
Benefits for Raj
- Regular Income: Raj receives ₹40,000 every month, which supplements his pension, helping him cover daily expenses without financial worry.
- Investment Growth: Since Raj isn’t withdrawing all his money, the remaining investment keeps growing, helping him earn more profits over time.
By setting up an SWP, Raj can enjoy financial stability without worrying about market fluctuations or outliving his savings.
Taxation of SWP
When you redeem your mutual fund holdings via SWP, you may earn capital gains on redemption. Those capital gains are taxed based on the type of mutual fund redeemed and its period of holding.
| Type | Short-term capital gains tax < 1 year | Long-term capital gains tax ≥ 1 year |
| Equity mutual funds | 20% | 12.5% without indexation |
| Debt mutual funds | Slab rate | Slab rate |
Wait, there’s more!
Here are 4 few ways SWP can help you apart from securing your retirement
1. Supplementing Income: If you’re planning to start a new venture, take a career break, or to switch jobs, your income may not be predictable. Setting up an SWP from your mutual fund investments can give you a steady monthly cash flow to meet your needs.
2. Funding Higher Education: If you’ve got kids heading to college, an SWP can be a lifesaver. Instead of paying tuition fees in big chunks, you can invest money monthly and use an SWP to manage these expenses semester by semester.
3. Managing Emergency Funds: During times like the pandemic, when financial instability is common, setting up an SWP can provide regular income from your emergency savings or investments to cover daily expenses.
4. Systematic Reinvestment: As you approach a big financial goal, like buying a house or funding a large project, you might want to start securing your profits. An SWP can help you gradually shift money from Investments to EMIs.
SWP could be a smart way to secure your: retirement, steady income, and investment growth without the need for constant management.
SUMMARY
Refer the image below for the summary of the entire Read. Hope you became smarter with money now.
