3 Things To Keep In Mind If You Plan To Use SWP For Regular Income In Your Retirement

Systematic withdrawal plan (SWP) in mutual funds is quite popular among retirees for getting a regular income during retirement. Systematic Withdrawal Plan (SWP) is a facility to withdraw a predetermined fixed or variable amount from your mutual fund investment at a regular frequency.

Retirees usually consider that the amount withdrawn through SWP would be compensated by the return on investment earned on their underlying invested corpus. Thus, it would allow the retirement corpus to last longer and outpace inflation in the long run. It is important to keep three crucial points in mind while using the SWP option for a regular cash flow during your retirement.

Consider A Sustainable SWP

The size of the SWP should be strictly synced with the remaining number of years you are expected to live, the inflation rate, and the return on investment offered by the underlying invested corpus. If the withdrawal size is larger than what your remaining expected life years and the return on investment offered by your corpus can sustain, then it increases the chances of exhausting your retirement corpus earlier than your expected remaining life.

Avoid A High Exposure To Equity

Your retirement fund should be invested in low-risk instruments, and there should be minimal exposure to volatile assets like equities. An SWP linked to an equity fund may result in a withdrawal when the market is giving a negative return; thus, you may quickly deplete your corpus. You should prefer to invest in funds that match your risk profile and return requirement so that you can preserve your corpus for a longer period.

Beware Of Tax Implications

Fund withdrawals through the SWP facility are subject to taxes at the applicable rate, depending on the type of underlying fund. For example, any gain on debt mutual funds is taxed at your applicable income tax slab rate. Long-term capital gains on equity-related instruments up to Rs 1.25 lakh in a financial year are tax-exempt, and any gain above this threshold limit is taxed at a 12.5 per cent rate. Short-term capital gains on equity-related instruments are taxed at a 20 per cent rate. So, if you are using the SWP facility, then you must calculate the tax liability applicable to such transactions in advance.

SWP can be efficiently used as a tool to create a consistent cash flow in the long term and earn a decent return on the underlying retirement corpus. For better selection of the asset class for your retirement corpus and to estimate the size of the SWP, you may get advice from a Securities and Exchange Board of India (Sebi)-registered investment advisor.

The author is an independent financial journalist.

Note: This article is intended solely for educational and informational purposes. It should not be construed as investment, financial, legal, or tax advice. Readers are advised to consult an appropriate professional before acting on the information provided.