Income tax return: This is how tax is calculated on returns from mutual fund SWP
While Systematic Investment Plans (SIPs) are being used by investors to build a corpus in a planned manner, Systematic Withdrawal Plans or SWPs can be used to redeem their investment from a mutual fund scheme in a phased manner. It allows you to withdraw money in installments, unlike the lumpsum withdrawals.
While Systematic Investment Plans (SIPs) are being used by investors to build a corpus in a planned manner, Systematic Withdrawal Plans or SWPs can be used to redeem their investment from a mutual fund scheme in a phased manner. It allows you to withdraw money in installments, unlike the lumpsum withdrawals. SWP helps you deal with market fluctuations and customize the cash flow as per your requirement. The scheme is also used by investors to generate a regular monthly income. The money withdrawn can be reinvested or retained in the form of cash.
How are returns from SWP taxed?
Rohit Ambosta, Chief information Officer, Angel Broking Ltd explained that for each month, the withdrawal will be split up into the return component and the capital component. "The capital component withdrawal is tax free. However, the return component is taxed as capital gains," he told Zee Business Online.
"In case of debt funds, if your holding period is less than 36 months, then the amount that you withdraw will form a part of your income. It will then be taxed according to your income slab. On the other hand, if the holding period is more than 36 months, then the long-term capital gains will be taxed at 20% with indexation," Rohit added. The investors should know that in case of equity funds, if the holding period is less than 1 year, then the withdrawn amount will be taxed at the rate of 15%. "On the other hand, if the holding period is more than 1 year, then the long-term capital gains will be taxed at 10% without indexation," he said.
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Are they taxed differently from regular withdrawal?
Srikanth Meenakshi, co-founder and COO, FundsIndia.com told Zee Business Online, "From taxation perspective, they are no different from a regular redemption from a mutual fund investment. So, for each “installment” of redemption, there would be a short term or long term capital gain (or loss) incurred, and at the end of the year, they will be accumulated into a total gain (or loss) for the year. This total gain (or loss) would be subject to regular capital gains taxation laws, depending on whether the fund redeemed from is an equity fund or a debt fund."
What investors must know
It is important to understand that when you opt for SWP, it affects your mutual fund account too. In case of fixed deposits where you receive monthly interests, the corpus value is not impacted when you withdraw the interest. However, in case of SWP, the value of your fund is reduced by the number of units you withdraw.