What is Systematic Withdrawal Plan (SWP) in Mutual Funds?

Systematic Withdrawal Plan (SWP) is a method of withdrawing money at regular intervals from a particular mutual fund scheme.  Just like Systematic Investment Plan (SIP), which allows investors to invest predetermined amount to a particular mutual fund scheme at predetermined date, SWP helps investors to withdraw predetermined amount at a predetermined regular intervals from a particular scheme.

SWP helps investors to redeem only the required amount while staying invested with the scheme for the remaining amount.  When you have generated good return and accumulated a corpus and you need money for your needs, now you want to redeem the required amount.  At the same time you may not want to redeem all the units at one time especially you don’t need the whole amount. 

How Does SWP work?

In SWP, a fixed amount is redeemed every time at the prevailing NAV of a scheme that may vary from time to time.  This will reflect in the number of units redeemed. 

Suppose, you hold 2000 units in a scheme and you redeem Rs.5000/- every month and NAV is Rs.12 in the first month, you would redeem 417 units (5000/12).  In the next month if NAV becomes Rs.10, you would redeem 500 units (5000/10).  So, 1083 (2000–(417+500)) units would remain in your account after two months of withdrawals. 

So when the NAV is higher, you redeem lesser units and when it is higher, you redeem more units.  While the NAV of the scheme increases, redeemed units will become lesser and lesser.  This helps you to stay invested and reap the appreciation of your money.  SWP averages out the value of return in a fluctuating market conditions.  SWP is allowed only in open-ended schemes.

Taxation of SWP

Systematic withdrawals also attract tax either as long term capital gain or short term capital gain.  The withdrawals under SWP is taxed as per First in first out Method (FIFO). 

Where the units of an equity purchased at the beginning of the investment period are redeemed after a year, the gains are considered as long term capital gain are taxed at 10% when the gain is more than Rs.1 Lakh per year.  The gains of units from debt schemes when withdrawn after 36 months are considered as long term gains and are taxed at 20%. 

The gains from equity schemes withdrawn within a year are considered as short term gains, taxed at 15% and the gains from debt schemes withdrawn before 36 months as considered as short term gains, taxed as per income tax slab. 

Systematic Withdrawal Plan is also a tax efficient plan if your gains from equity investments withdrawn under SWP is less than Rs.1 lakh in a year, the gains are not taxed and you can save tax. 

Can you opt for SWP?

Retired people can opt for SWP who want a regular flow of income every month.  Not just retired people but also others who want fixed income every month or every quarter can choose SWP.

SWP is allowed in two ways, one is withdrawal of fixed amount every month/quarter and the other is withdrawing an appreciated amount every month/quarter.   SWP works best when you have accumulated a corpus.  Corpus is the overall appreciation of your investments.