Regular income is one thing that each one of us wants throughout our lifetime but a very few of us work on it. As long as we are still working, regular income is not a big deal, but once you retire or are nearing your retirement, the taught of no income haunts. The systematic method of investment helps resolve this issue. The systematic method is a combination of three factors- SIP, STP, and SWP i.e. Systematic investment plan, systematic transfer plan, and systematic withdrawal plan.
If you wish to get a regular income, SWP is the thing you need to consider. SWP enables you (investor) to withdraw a specific amount of money at regular intervals and takes care of the regular income affair.
Traditionally, investors used to opt for the dividend option in order to receive a regular income. But since June 2013, the dividend option has become less popular due to the tax imposed on it. The DDT or Dividend Distribution Tax has lowered the audience for dividends and increased SWP’s popularity since then.
What is SWP?
A systematic withdrawal plan is an option offered by a lot of fund houses to investors allowing them to plan the withdrawal of their interest earned on the investment preferably made through SIP. SWP allows you to withdraw a specific amount of money at regular intervals for a fixed tenure at pre-determined dates. For example, Vivek can opt for Rs. 45000 withdrawal from his investment on every 4th of the month for the next 10 years. To know more about Systematic method of investment, read https://www.piggy.co.in/blog/sip-stp-swp/
Which option to choose?
This choice totally depends on your cash flow and liquidity requirements. Depending upon the size of your family and expenses, you can make the choice. Another factor which counts in while considering withdrawal options is tax efficiency.
A DDT of 28.84% comes tagged along with all non-equity investments, for the rest of the investments, the dividends are tax-free. Most of the AMC’s claim to bear the DDT amount but in reality, the amount is borne by the investor only.
In the case of SWP, each withdrawal is a sale which is taxed accordingly after being added to the investor’s income. All withdrawals within 3 years of purchase are treated as short-term gains and post 3 years as long-term gains attracting long-term capital gain tax.
The taxation also gets affected by another process called Indexation. Due to indexation, the amount to be paid as tax decreases considerably depending upon the indexed cost.
As far as equity funds are concerned, a span of 1-year counts as short term and on long-term capital gain there is no tax.
With dividend option, the cash flow totally depends on the discretion of the fund manager. The amount to be paid as a dividend is also dependent on the distributable surplus available for a particular scheme. Also, the timings of fund distribution and investor needs may not match.
In the case of SWP, everything is under the investor’s control. The amount which he/she wishes to withdraw plus the timings or the interval at which the withdrawal is to be made. With SWP, you are ensured of a regular cash inflow.
On a concluding note, it is very important to understand your liquidity needs and plan the investments accordingly. There are plenty of options available in the market but choosing the right one from them is a big deal. Not all options are as promising as they might seem. Managing wealth is an important thing but before that wealth needs to be created. Do not hesitate in seeking expert advice if you find yourself in a dilemma. Reach out to best experts in the industry at https://www.piggy.co.in/premier/ and see your wealth grow.
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