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Opt for Systematic Withdrawals from Debt Funds

Systematic Withdrawal Plans (SWPs) is recommended for people who are seeking to reduce their tax liability on redemption from debt funds.

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Investing in short-term funds or bond funds and then using SWPs can be both tax-friendly and helpful. SWPs are useful for people who do not need their money at one go. This withdrawal system lets investors withdraw a specific amount and pay tax on the gains or earning portions of the sum withdrawn.

Suppose an investor invests some amount in Fixed Deposit and he will earn 10 percent in a year. After a year, he will receive the interest income, and if he redeems this interest income from the deposit, the entire amount will be taxable as per the slab rate. If he falls into a higher tax bracket, he must pay a much higher tax on the interest income.

Similarly, if a person invests the same amount in a short-term fund, earns 10 percent in a year and uses SWP to redeems the amount every year, he will not have to pay tax on the entire interest income. Our Director, Mr Vaibhav Sankla says that tax will only apply to the gains part of the redeemed amount.

The capital gains tax will be 20 percent after indexation, as per the new rules, after three years. Mr Sankla further adds that after considering indexation, the long-term gains will be close to nil, as the cost inflation index is rising about 10 percent and returns on debts are eight or 9 per cent. Sometimes, it so happens that the index value and returns are close and long-term capital gains could be zero.

Source : Business Standard