Where you can withdraw a fixed amount from your Mutual Fund at regular intervals, on the other hand Systematic Withdrawal Plan is similar to FD in a way, in which you invest once and get returns at regular intervals.
Tax on Investment: Where will you invest your hard earned money for regular income? First Answer Fixed Deposit (Fixed Deposit) There will be, because it is easy to understand and at the same time it gives you assured returns. But before investing you have to consider the tax element. (Tax Elements) also have to be taken into account. You cannot ignore this because interest from FD Tax on FD Income is taxed according to your tax slab which can be up to 20-30%.
For example, if you invest Rs 10 lakh, you can earn Rs 12,500 every quarter or Rs 50,000 every year at an assumed interest rate of 5 percent. Now you will have to pay tax even on the interest income of Rs 50,000 received on this every year. Assuming you fall in the tax slab rate of 30 per cent, then it will be Rs 15,000. Now there is an easy way to reduce this tax liability to just Rs 457, which is being told to you here, know how…
Invest in SWP
The answer lies in SWP i.e. Systematic Withdrawal Plan, which is unlike Systematic Investment Plan or SIP, where you can withdraw a fixed amount from your Mutual Fund at regular intervals. At the same time, you can see it like FD where you invest and regular payments are made in return. But the similarities between the two end here as the taxation method is quite different for both.
It is taxed only on capital gains
Why? This is because units in mutual funds are redeemed every month to give you regular income. Therefore, the redemption amount includes principal and capital gains and the tax liability will be on the capital gains component only. But in the case of FD, the entire interest income comes under the tax net.
understand this first
You can start SWP with both equity or debt funds, but generally debt funds are preferred for regular income after retirement. An important point in case of debt funds is that if you redeem the units before three years, the capital gain is taxed as per the slab rate, while the long term capital gain is taxed at 20% with indexation.
Understand here how tax will be reduced by 97 percent
So instead of FD, if you invest the same amount of Rs 10 lakh in debt mutual fund at NAV of Rs 40, you will get 25,000 units. Assuming that the debt fund will give an annual return of 5%, the NAV after one quarter will increase to Rs.40.50. Now if you opt for quarterly withdrawal of Rs 12,500, you will redeem 308.64 units in the first quarter. Since only the capital gain component will be taxed, which is Rs 0.50 (40.50-40) per unit, the value of your capital gain will be Rs 154. 30% tax on the same will be Rs.46. If you continue with this practice for the remaining three quarters, the annual capital gain will be Rs 1524 and the tax liability will be Rs 457, which is 97% less than FD.
This discount is not available in debt funds like FD
But before taking advantage of SWP, understand that the interest rate in FD is fixed whereas in debt funds, the returns fluctuate due to interest and credit risk. Apart from this, the total interest earned on your bank accounts including RD and FD is exempted under section 80TTA of Rs 10,000. This limit is Rs 50,000 under section 80TTB for senior citizens. There is no such exemption on returns from mutual funds. Hence, keep the exemption portion in mind while analyzing the tax benefits.
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