Summary of this article
SWPs offer regular income with tax-efficient withdrawals in retirement
LTCG taxed at 12.5 per cent with Rs 1.25 lakh annual exemption
Strategy: use debt for steady income, equity for long-term growth
Optimise withdrawals to keep tax liability low or negligible
On retirement, people need a regular income from the corpus they have accumulated in their lifetime. Here is how to make the withdrawals most tax-efficient.
How Systematic Withdrawal Plans Work
The Systematic Withdrawal Plans (SWPs) allow a regular income with minimum taxation by redeeming an optimum number of units periodically. For each withdrawal, the capital gains are calculated after deducting the cost on a first-in-first-out (FIFO) basis from the redemption value. Further, since the gains would be subject to long-term capital gain taxes, as the units must have been held for longer than 12 months, an exemption up to Rs 1.25 lakhs shall also be available for every such financial year.
“The rate of tax on any additional long-term capital gains payable is also at a lower rate of 12.5 per cent. Hence, SWPs may allow withdrawal of an optimum number of units at the prevailing value such that the capital gains are minimal, keeping in mind the exemption limit, leading to zero or negligible tax on the withdrawals. This makes SWPs a very tax-efficient option for retirees,” says SR Patnaik, partner (head - taxation), Cyril Amarchand.
Balancing Equity And Debt
Retirees should have a mix of equity and debt instruments to ensure decent growth in value and a stable flow of funds while maintaining low tax liability. “Retirees may rely on debt instruments for a minimum predictable cash flow below the taxability thresholds. Beyond that, they may rely on SWPs for tax-efficient withdrawals of additional funds,” says Patnaik.
Practically, it is better to use debt instruments for day-to-day financial needs and use equity-oriented funds for long-term planning since returns from debt funds are not directly linked to market volatility. “Benefits from equity funds are optimal with long-term investment since taxes are low only if they are sold after at least 1 year of holding the investment,” says Ritika Nayyar, partner, Singhania & Co.
One can structure this by planning investments in debt funds for regular day-to-day financial needs and keeping investments in equity funds for long-term wealth creation and growth. Long-term gains exemption on equity funds up to Rs 1.25 lakh can be helpful in mitigating taxes at the time of such withdrawals needed for long-term financial needs.
