Systematic Withdrawal Plans (SWPs) are a popular way for retirees to generate regular income from mutual funds. But how these withdrawals are taxed often confuses investors.
Moneycontrol’s Ask Wallet-wise initiative offers expert advice on matters related to personal finance and money-related queries. You can email your queries to askwalletwise@nw18.com, and we will try and get a top financial expert to address your queries.
I have a doubt about SWP. Suppose I have accumulated Rs 1 crore in equity mutual funds and start a Systematic Withdrawal Plan (SWP) of 6% annually (Rs 50,000 per month, i.e., Rs 6 lakh a year). How will this be taxed if I have no other income? For example, out of Rs 6 lakh withdrawn, Rs 1 lakh is treated as my invested capital, and Rs 5 lakh is long-term capital gains (LTCG). Since LTCG up to Rs 1.25 lakh (Rs 1 lakh exemption + Rs 25,000 from the basic exemption limit) is tax-free, do I pay 12.5% tax only on the remaining Rs 3.75 lakh, after adjusting the Rs 3 lakh basic exemption?
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.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
