Having a regular source of income can greatly help with relieving financial stress, that’s why a lot of people have jobs. But there are lots of ways to generate a regular source of income and one of those ways is through your investments. Two primary ways of receiving a regular income from your investments are through a bank Monthly Income Scheme (MIS) or a mutual fund Monthly Income Plan (MIP). Both of these options come with their pros and cons.
A bank MIS is similar to a fixed deposit that pays the holder a monthly income depending on the prevailing interest rates. Bank MIS rates are the same as the prevailing Fixed Deposit interest rates, which is presently around 7% per annum. Most people opt for this as there is a guaranteed source of income periodically and it offers good capital protection. The other option, an MIP is a debt mutual fund scheme that invests a small amount in equity to provide the investor with a better rate of return when compared to MIS. As this investment has an exposure to equity it is exposed to market volatility, this can make some the dividend payouts on this scheme irregular. To ensure a periodic income a lot of investors in MIPs opt for a Systematic Withdrawal Plan (SWP). An SWP offers periodic redemption of a predetermined number of units to provide the investor a regular income. SWPs offer investors a fixed income periodically even if the fund is incurring losses, this can cause the SWPs to eat away at the capital invested.
MIPs are debt funds and taxed accordingly. Investors in MIPs do not have to pay any tax on dividends but the mutual fund house has to pay a Dividend Distribution Tax (DDT) at 12.5%. All MIPs are paid after the payment of DDT.
If an investor seeks to start an SWP within 1 year of investing they will have to pay both Short-Term Capital Gains (STCG) tax and Long-Term Capital Gains (LTCG) tax. LTCG is taxed 10% without indexation and 20% with indexation. To avoid paying STCG tax investors should start an SWP one year after investing.