I have started Systematic Withdrawal Plan (SWP) of Rs 1 crore. How will it be taxed?

How are SWPs taxed?

Expert Advice: Where an individual has accumulated a corpus of Rs. 1 crore in equity-oriented mutual funds and initiates a Systematic Withdrawal Plan (SWP) of 6% per annum (i.e., Rs. 50,000 per month or Rs. 6,00,000 per annum), the tax implications u/s 112A of the IT Act would apply. It is assumed that the investment qualifies as a long-term capital asset (i.e., held for more than 12 months) and the sale of units is subject to Securities Transaction Tax (STT).

In the above case, the annual withdrawal comprises Rs. 1,00,000 representing the cost of acquisition (capital portion), and Rs. 5,00,000 representing long-term capital gains (LTCG). Since the individual has no other income, the basic exemption limit can be utilised to offset a portion of the LTCG, as permitted under the proviso to Section 112A. The LTCG up to Rs. 1,00,000 is exempt under Section 112A, and the remaining portion of the basic exemption limit can be further set off against the remaining capital gains. The tax computation is set out below:

An SWP can be a smart way to generate regular income in retirement. The tax liability depends mainly on how much of your withdrawal is capital versus gains. Planning your withdrawals carefully ensures you maximise tax benefits and pay only what’s due.