Is monthly income from SWP taxable?

As an investor seeking a steady income stream, a Systematic Withdrawal Plan (SWP) has likely caught your attention. An SWP allows you to regularly withdraw a predetermined amount from your mutual fund investments. While it provides financial stability, it is essential to understand the tax implications associated with an SWP.

What is a systematic withdrawal plan?

A systematic withdrawal plan (SWP) is an investment facility mutual funds offer. It allows investors to withdraw a fixed or variable amount from their mutual fund investment at regular intervals, typically every month.

The withdrawn amount serves as a regular income for the investor, making an SWP an attractive option for those seeking a steady income stream while keeping their investments intact.

Taxation on SWPs

An SWP has specific tax implications that investors should know. The taxation of an SWP depends on the type of mutual fund and the holding period of the investment.

Let’s break down the tax implications:

Capital gains tax: When you initiate an SWP, the withdrawn amount is subject to capital gains tax. The capital gains tax can be categorized as short-term or long-term, depending on the holding period of the investment.

  • Short-term capital gains tax: If the units being redeemed are held for less than 36 months, the gains are considered short-term capital gains (STCG). In such cases, the profits are added to your taxable income and taxed at your applicable income tax slab rate.
  • Long-term capital gains tax: If the units being redeemed are held for 36 months or more, the gains are classified as long-term capital gains (LTCG). As of the current tax regulations, LTCG on equity-oriented mutual funds exceeding ₹1 lakh in a financial year is subject to a flat tax rate of 10% without indexation benefits. 

Dividend Distribution Tax (DDT): Regarding dividend payout options within an SWP, the mutual fund company is liable to pay dividend distribution tax (DDT) before distributing dividends to investors. However, it’s important to note that DDT has been abolished effective April 1, 2020. Consequently, dividends received from mutual funds are now taxable in the hands of the investor as per their applicable income tax slab rate. 

Strategies to minimize tax liabilities

While an SWP may attract capital gains tax, there are strategies to optimize your tax liabilities:

  • Optimize your withdrawal amounts: One strategy is carefully planning the amount you withdraw through an SWP. You can minimize your taxable income by removing only the needed amount for your expenses.
  • Utilize the benefit of indexation: If you have invested in debt-oriented mutual funds or funds with fixed-income securities, you can consider utilizing the indexation benefit. Indexation adjusts the purchase cost of your investment based on inflation, thereby reducing the taxable gains.
  • Diversify your investments: To reduce tax liabilities, it is helpful to spread out your investments across various asset classes. By spreading your investments across equity-oriented funds, debt funds, and other suitable investment options, you can take advantage of the differential tax treatment for different types of investments. 

To wrap up

While an SWP provides a convenient means to generate a monthly income from your mutual fund investments, it is crucial to understand its tax implications. By being aware of the tax rules governing an SWP, you can make informed decisions that minimize your tax liabilities.

Post Author: Alison Lukas