Systematic Withdrawal Plan (SWP) & Systematic Transfer Plan (STP)
Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs) and Systematic Transfer Plans (STPs) are terms you’ve probably come across while investing. We’ve covered SIPs and their benefits in another article. In this article, let’s look at its variants – SWPs and STPs and how they can be used.
What are Systematic Withdrawal Plans (SWPs)?
A Systematic Withdrawal Plan allows you to withdraw a fixed sum of money from a fund at regular intervals. This is deposited in your bank account. SWPs are opted for by people who want a steady flow of income over time e.g. retirees.
What are Systematic Transfer Plans (STPs)?
A Systematic Transfer Plan allows you to transfer a fixed sum of money from one fund to another within the same fund house. The investor chooses the fund from which the transfer is made, the fund to which the transfer is made, the STP amount, STP date and STP frequency (daily, weekly, monthly, quarterly).
STPs work between both debt and equity funds: debt to equity, and equity to debt. Scenarios where STPs are usually used are when:
- you have a lumpsum to invest, and you want to deploy it in equity – in this case, the lumpsum is first invested in a debt fund so it can earn a better than savings return, and a fixed sum is regularly transferred to equity for capital appreciation.
- you approach your goals – in this case, a chunk of investments in equity are moved to debt funds for capital protection while the money continues earning returns
- you want to rebalance your portfolio to match the asset allocation mix you’re comfortable with
Note: An STP is considered as a redemption from one fund and a fresh investment in another.
Taxation of STPs and SWPs
As STPs and SWPs involve redemption of units, capital gains taxes apply on them. Short-term capital gains tax on equity funds (15%) apply on holdings of less than a year, and on debt funds (tax-slab) apply on holdings of less than 3 years. Long-term capital gains tax on equity funds (10%) apply on holdings greater than a year and are exempt up to 1,00,000. Long-term capital gains tax applies on debt funds (20% with indexation benefit) with holdings of greater than 3 years.