Dividend Payout and Systematic Withdrawal Plan(SWP) — Explained
If you are someone who loves regular income from your investments, you can opt for a dividend payout option or SWP. This article will help you understand these schemes and make a wise choice based on your preferences.
Dividend Payout Option
Under this option, part of the gains realized by the scheme is paid out to you in the form of dividends. The net asset value NAV of the scheme falls to the extent of the payout. For example, if a fund has NAV of Rs. 100 and declares Rs. 2 dividend, the fund will have to sell portfolio holdings amounting to Rs. 2 in the market and pay this out as dividend. The NAV will reduce by this sum and become Rs. 98. Hence, dividends should be seen as a periodic profit booking and not as an additional gain. In the case of debt funds, the fund house pays a dividend distribution tax (DDT) of 28.84% and for equity funds it is 10%.
In dividend options, frequency and/or payout of the dividend are not certain or fixed beforehand. Sometimes, if the scheme (with monthly dividend payouts) cannot generate sufficient profits, you may have no dividends to be paid. Hence every month you may have different amount coming in and some months there might be no money received.
Systematic Withdrawal Plan
SWP provides you with specific income at pre-determined time intervals, like monthly, quarterly, half-yearly or annually. It is like salary income coming to bank account on a fixed date. You can invest a lump sum amount or start a SIP under this scheme. Unlike dividend payout schemes, SWPs guarantee a steady income and let investors customize the income according to their needs.
In an SWP, each withdrawal is treated as a sale. For equity mutual funds, gains from withdrawals in the first year will be taxed at 15%. If you redeem/withdraw your investments in equity mutual funds after 12 months, your investments would qualify for long-term capital gains tax of 10% on gains exceeding Rs. 1lakh. Besides, a small investor may be able to avoid tax on his gains altogether if the long-term capital gains accrued on the amount withdrawn under the SWP remains below the Rs 1 lakh threshold.
Please read our article on ‘Systematic Withdrawal Plan vs Dividend Payout Option’ to know how SWPs are more tax efficient and a better option to generate periodic income.
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