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(Precious) Words of Wisdom : "Risk comes from not knowing what you’re doing." ~ Warren Buffett

Use 'Systematic Withdrawal Plan' option to cut your tax liability on debt funds

As you would be aware, Dividend Distribution Tax (DDT) applicable on the dividend received from debt funds is set to increase from 12.5% to 25% w.e.f. June 1, 2013. This, together with surcharge of 10% and cess 3%, would mean a total tax liability of 28.33%.

Accordingly, the tax arbitrage opportunity vis-a-vis interest income (especially for those who have to pay 20% or 30% tax on interest) is lost.

As mentioned in an earlier post, there is an option to avoid paying this high tax - (a) switch from 'Dividend' option to 'Growth' option and (b) hold your investments for at least one year.

But what about regular income that you earlier enjoyed in the form of dividends?


Simple! After your investments complete one year, opt for SWP.

SWP (Systematic Withdrawal Plan) is the facility provided by MFs, whereby a pre-determined amount is returned to you periodically. The balance amount continues to remain invested and earn returns for you. So this is as good as receiving regular dividends while the principal remains invested. In a way, this might be better as you decide how much amount you need periodically instead of depending on how much dividend the MF declares every month.

However, the best part is that part amount of this withdrawal is 'principal' and part amount is 'long term capital gain'. While the principal part is not taxable, the capital gains is taxed at just 10%. Thus the overall tax liability is very nominal...in fact lower than what you would have otherwise paid under Dividend Option.

This strategy allows you to continue receiving regular income from your debt mutual funds and still pay only a nominal tax on it. 


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