Income tax returns (ITR) filing: Mutual fund STP, SWP offer big benefits to investors
When you sweep funds out of an equity or debt fund it will be treated as a sale and taxed accordingly. If you are sweeping money out of debt/liquid funds into equity then any sale before three years will be short-term capital gains (STCG) and will be taxed as per your slab rate. Alternatively, any sale after three years will be LTCG and will attract tax at 20% after indexation.
We have all heard of Systematic Investment Plans (SIPs) and their relative benefits. A slight variant is the Systematic Transfer Plan (STP) and the Systematic Withdrawal Plan (SWP). What exactly is the STP and the SWP and what are the tax implications of the same?
When to use an STP?
Assume that you got a lump-sum receipt of Rs 8 lakh from the sale of land. You have decided to invest the money wisely in equity funds to create wealth over the next 10 years. However, you have two considerations. Firstly, since the Nifty is quoting at a P/E of 22 and you want a better price. Secondly, you want to ensure that idle money is deployed more productively. The answer will be an STP. You can invest the corpus of Rs 8 lakh in a liquid fund and sweep a fixed sum of say Rs 35,000 each month into an equity fund over the next two years. The liquid fund will yield more than your bank savings account and you get the benefit of rupee cost averaging.
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Tax implications of STP
When you sweep funds out of an equity or debt fund it will be treated as a sale and taxed accordingly. If you are sweeping money out of debt/liquid funds into equity then any sale before three years will be short-term capital gains (STCG) and will be taxed as per your slab rate. Alternatively, any sale after three years will be LTCG and will attract tax at 20% after indexation. On the other hand, if you sweep out of an equity fund then any sale before one year will be STCG and will be taxed at 15% and a sweep after a year will be LTCG and will be tax-free up to Rs 1 lakh per annum. Beyond that, it will attract a flat tax of 10%. You need to factor these tax implications and exit loads when deciding upon an STP.
What is an SWP?
SWP is essentially used for regular fixed income where the SWP from a debt/ liquid fund is set up in such a way that a fixed portion gets withdrawn each month and is basically used by pensioners. Did you know that SWPs work beautifully when interest rates are falling? That is because debt funds NAVs will rise more rapidly. In a falling interest rate scenario, the NAVs of debt funds go up.
Tax implications of SWP
SWPs are normally done on debt funds or liquid funds as they are more predictable compared to equity funds. In case of debt funds, it is LTCG only if held for more than three years. In case of SWP, each withdrawal will be treated as a mix of principal and capital gains withdrawal and only the capital gains portion will be taxed. That makes an SWP a lot more tax efficient.
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Both the STP and the SWP are highly flexible products and you can use it in the most efficient manner after considering taxation and impact of exit loads.
Source: DNA Money