One of the investor’s key requirements from his/her investment is a stream of cash flow to meet his expense requirement of different natures. Dividend/dividend payout has been a sought after option till some time back and investors chose this option earnestly to serve their objective. However post 1st April 2020 after change in dividend taxation rules, dividend payout/option has turned less attractive or even disadvantageous to the investors. Now, dividend received is added to total income of the investors and charged tax at their marginal rate of taxation. Additionally, there is Tax deduction at source (TDS ) if dividend income is in excess of 5000/- ( annual) . The tax incidence is now shifted to investors with a bigger impact on those investors who are into the higher / highest tax bracket. All these development have shifted the attention away from dividend /dividend option to a more prudent choice i.e. SWP . SWP is a meritorious option to set up your cash flow requirement over a longer period of time . If planned smartly, SWP as a tool can facilitate investor’s various expense management over different stages of life . If investor keeps his withdrawal rate to a reasonable level and allow his investment to grow well before starting withdrawal , he / she can reap the benefit for a longer time .
On the backdrop its important we nudge our investors and channel partners towards SWP as a preferable option for regular income . Existing investors and prospective investors need to be guided based on multiple advantages which SWP offers over dividend payout . Here is a comparison table to highlight the fact,
| Dividend Payout | Systematic withdrawal option ( SWP) | |
| Scope of payout | Dependent on availability of distributable surplus | Dependent of accumulated value of units |
| Quantum of payout | Based on fund’s performance & at fund house’s discretion | Investors can decide the cash flow
( fixed amount) |
| Payout Periodicity | At fund house’s discretion and policy | Investor can decide frequency( monthly or quarterly |
| Tax efficiency | • Less tax efficient
• Entire cash flow received is taxable • TDS at 10% for dividend amount above `5,000 From 1st April 2020, treated as regular income & ttaxable in the hands of unitholders/ investors at the applicable marginal rate of taxation. |
• Better tax efficient
• Only capital gains earned is chargeable • TDS not applicable Debt funds: For 36 months or less – the withdrawal is a part of your income and STCG @ applicable income tax slab rates For period more than 36 months – LTCG @ at 20% with indexation. LTCG on transfer of listed units for nonresident investors shall be taxable @20% and 10% on unlisted units without applying indexation provisions. Equity funds: For 12 months or less – STCG @ 15% For more than 12 months – LTCG @ 10% without indexation . LTCG for equity only if the total long term capital gains are more than one lakh in a Financial Year |
| Reduction in NAV | Yes | No (number of units get reduced) |
| Disciplined builder | Not possible in dividend payout | It inculcates a disciplined withdrawal habit |
To propagate SWP as a concept , we have prepared a presentation which talks about its features , working and tax efficiency . Hope this will aid to your ground efforts . We are also working on one leaflet which will be shared in due course