Many mutual fund investors believe that when they make withdrawals under a Systematic Withdrawal Plan (SWP), they are initially withdrawing their own invested capital, and only the subsequent withdrawals are subject to tax. However, this is a myth. In reality, each withdrawal under an SWP is treated as a partial redemption of mutual fund units, and the tax is calculated based on the capital gains associated with each redemption, not on the order of withdrawal of the invested amount.
A Systematic Withdrawal Plan (SWP) is a method of withdrawing a fixed amount of money from a mutual fund at regular intervals. The taxation of SWP in India depends on the type of mutual fund from which the withdrawals are made—whether it is an equity fund or a debt fund.
Taxation of SWP from Equity Mutual Funds
- Short-Term Capital Gains (STCG): If units of the equity mutual fund are held for less than 12 months, the gains are considered short-term. STCG on equity funds is taxed at 15%.
- Long-Term Capital Gains (LTCG): If units are held for more than 12 months, the gains are considered long-term. LTCG on equity funds exceeding ₹1 lakh in a financial year is taxed at 10% without the benefit of indexation.
Taxation of SWP from Debt Mutual Funds
- Short-Term Capital Gains (STCG): If units of the debt mutual fund are held for less than 36 months, the gains are considered short-term. STCG on debt funds is taxed according to the individual’s income tax slab.
- Long-Term Capital Gains (LTCG): If units are held for more than 36 months, the gains are considered long-term. LTCG on debt funds is taxed at 20% with the benefit of indexation.
Taxation Process
- Each withdrawal through an SWP is treated as a redemption of mutual fund units.
- The gains or losses are calculated based on the difference between the purchase price and the redemption price of the units.
- The tax liability is computed based on the holding period of the units redeemed.
Example
Assume you invested ₹10,00,000 in a mutual fund and opted for an SWP of ₹10,000 per month.
- Equity Fund:
- Debt Fund:
Considerations
- Impact of Frequency: Frequent withdrawals can lead to higher short-term capital gains, which may be taxed at a higher rate.
- Tax Planning: Effective tax planning and understanding of holding periods can minimize tax liability.
- Documentation: Keep records of purchase prices and redemption prices to accurately compute gains and losses.
Conclusion
Understanding the tax implications of SWP is crucial for effective financial planning. It is advisable to consult with a tax advisor (www.realextax.com) or financial planner (www.realexuscapital.com) to optimize tax efficiency and align withdrawals with financial goals.
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