SWP works just opposite to SIP or systematic investment plan. The plan allows greater flexibility in respect of the investment, withdrawal, taxation etc. In the systematic withdrawal plan, an investor can plan and customize the cash flow scenario as per his needs.
Understanding working of SWP
Suppose you have an investment in mutual funds worth Rs. 1,00,000 and you are in need of funds on a constant basis for some of your requirement then you can place an SWP request. Instead of a complete exit from the scheme, depending upon the NAV amount and the withdrawal amount requested units will be redeemed.
Say, at an initial stage the NAV stands at Rs. 10 then there will be as many as 10000 units and if the withdrawal of Rs. 10,000 is asked for then as many as 1000 units will be sold. And on increase in the NAV value or net asset value of the mutual fund scheme, less number of units shall be up for sale.
In general, the term of your investment is directly associated with the net asset value i.e. higher the net asset value, to a larger extent or a longer duration will the scheme last.
Returns from SWP
It is to be noted that such fixed income stream investment options are capable of providing returns that are enough to beat inflation.
Taxation of SWP
The systematic withdrawal plan is not subject to TDS on the withdrawal amount but it is to be noted that capital gains are taxable in the hands of the investor. So, in a case, when the capital gains are made, it is wise to withdraw the gains to not fall in the capital gains tax net.